• Ryan O'Connell

Trump to American Consumers: Drop Dead!

June 3, 2019

Although Donald Trump loves to crow about the performance of the U.S. economy, he sure seems hellbent on sabotaging it.

Not content with unleashing an all-out trade war with China, the President threatened last week to impose a new round of tariffs on imports from Mexico. The timing was odd, since the Administration had finally obtained a revised NAFTA agreement with Mexico and Canada, after painful and protracted negotiations. Only two weeks ago, Trump had agreed to stop imposing tariffs on imports of those countries’ steel and aluminum, to soothe any hurt feelings and encourage their legislatures to approve the new NAFTA deal. (Our Congress must also okay the new agreement.)

But no matter. The previous tariffs involved trade policy, Trump said, while the new proposed tariffs concerned….immigration. The President was frustrated because Mexico was not doing enough, in his opinion, to stop the flow of refugees and immigrants to its border with the U.S. Trump announced that he would impose an initial 5% tariff on all imports from Mexico and he would increase the levy to 25% unless the Mexican government did…something. However, neither Trump nor other top U.S. officials set specific targets.

Mexico has become our largest trading partner, as various U.S. companies have shifted some production away from China to Mexico, because of the tariffs that Trump has levied on Chinese goods. Our imports with Mexico have risen to almost $350 billion, so the tariffs would involve a lot of money.

Who Really Pays the Tariffs?

Unfortunately, the Negotiator-in-Chief doesn’t seem to understand how international trade and tariffs work. He has held fixed views on these subjects for 30 years, and he has been wrong for 30 years. The President has refused to listen to most of his advisers and mainstream economists on these topics. Like any other very stable genius, Trump knows more than the experts do.

In Trump’s fantasy world, trade wars are easy to win, because the countries that are “ripping us off” in trade pay for the imports. The U.S Treasury collects “billions” from the tariffs, with "no costs or inflation for the U.S.", as he said in a recent tweet.

But it doesn’t work that way. China and Mexico don’t pay for the tariffs. You and I will foot the bill, along with other Americans. Tariffs are a tax on consumers, and they create a drag on the economy.

When a manufacturer in China or Mexico ships its products to the U.S., the

company importing the goods, not the exporter, has to pay the tariff. The importer could be a foreign manufacturer. However, it could also be an American company importing entire products (such as cars or Iphones) or parts that it has produced abroad. The importer is often an American firm that specializes in bringing goods through U.S. customs.

Trump: "TARIFF is a beautiful word indeed!"

In any case, the importer might choose to absorb the tariff for a while, to hang onto its market share, but that would reduce its profit margins. The importing company will have to raise its prices to offset the tariffs, either immediately or eventually. Consequently, the tariffs distort the market prices, and American shoppers face a choice: pay more for the same product or buy less of it.

So head to the store now and stock up on those avocados and limes, folks, because the price of guacamole and mojitos is heading up this summer, thanks to your President. At a 25% rate, Trump’s proposed tariffs on imports from Mexico would be almost a $90 billion tax on U.S. consumers, as estimated by The New York Times. Consumer demand would take a hit, because Americans would have less disposable income.

Tariffs would also hurt American companies. For example, U.S. auto manufacturers import a lot of cars from Mexico. They will have to accept lower profit margins, because of the tariffs, or raise their prices on some vehicles. Either result is bad for our economy. If the companies’ profit margins dip, they may cut staff or tighten up on compensation.

Moving Toward One-Man Rule

The political ramifications of Trump’s proposed tariffs on Mexico are also alarming. Like other authoritarian leaders, the President is using a trumped up “emergency” to take unprecedented actions that are of dubious legality. Trump is basing his measures on a vastly overblown “crisis” on the southern border to circumvent Congress and expand his power.

In the first instance, the President justified diverting funds allocated to projects on military bases to build part of his wall, even though Congress had specifically rejected his request for such funding. (A federal judge has blocked this maneuver, and the government is appealing that decision.)

In this latest instance, Trump claims to base his authority to impose tariffs on the International Economic Emergency Powers Act because “the United States of America has been invaded (emphasis added) by hundreds of thousands of people coming through Mexico and entering our country illegally”. That’s a pretty thin reed. Previous administrations have used the Act to freeze assets of individuals or nations or to block transactions, typically in situations involving terrorist groups or other direct threats to national security. No President has ever used the Act to impose tariffs.

Furthermore, Trump is resorting to these maneuvers even though—or perhaps because—they are not supported by Congress or public opinion. Trump is acting more and more like a king, willing to defy members of his own party and the voters. His actions are eroding the usual checks and guardrails of our democratic traditions.

Who Asked for Tariffs?

If this sounds far-fetched, ask yourself, who, besides Trump, has clamored for more tariffs on Mexico?

Here’s a list of those who have opposed more tariffs on Mexico:

  • The Republicans in Congress—even Senator Chuck Grassley has complained publicly

  • Rick Scott, the Republican Governor of Texas, who wants to protect his state’s huge trade relationship with Mexico

  • Top advisers such as Jared Kushner, Robert Lighthizer, U.S. Trade Representative, and Steve Mnuchin, Treasury Secretary (privately, of course)

  • American auto manufacturers and other importers of goods from Mexico

  • Wall Street—the stock markets have declined because of the tariffs on China and the threatened levies on Mexico

There is no obvious, large constituency demanding another round of tariffs on Mexico, but that doesn’t matter to Trump.

An Opportunity for Democrats

Up until now, the U.S. economy has been performing strongly, which is very good for Trump and a challenge for Democratic presidential candidates. But Trump’s threats to impose sweeping tariffs on China and Mexico could give Democratic politicians an opening. They could respond by reminding voters how much Trump’s trade policies could hurt them in the pocketbook.

The “consumer taxes” from Trump’s tariffs are piling up:

  • Up to $90 billion from tariffs on Mexican goods

  • About $60 billion so far on Chinese goods (25% on $250 billion)

  • Another possible $80 billion on Chinese goods (25% on another $325 billion)

If Trump carries through on imposing all these tariffs, that would be a $230 billion hit to American shoppers. Even for the mighty U.S. consumer, that’s quite a wallop.

Democrats have to be careful about pursuing this line of attack, because bashing China and Mexico is popular with some voters, including members of their own party. However, Democrats could emphasize that tariffs are a poor way to counter China’s trade practices and they harm American consumers, farmers and companies. Democrats could also point out that Mexico has basically played fair in trade (unlike China) and our two economies are closely connected now. A lot of American jobs depend on exports to Mexico. Are Markets Flashing Warning Signs?

Furthermore, the recent gyrations in the bond and stock markets may indicate that investors are becoming worried that Trump’s take-no-prisoners approach on tariffs for China and Mexico could hurt our economic growth. The S&P 500 has dropped about 7% over the last four weeks, after Trump raised tariffs on $200 billion of imports from China and surprised everyone with his new threats on Mexico.

The yield on the 10-year Treasury has fallen to 2.1% from 2.5% in early May, which is a fairly abrupt move in that market. The lower yield may signal that bond investors think the economy is losing momentum. If the economy does falter, it would be fair game to pin the blame on Trump and his trade wars. You said you alone could fix it, Mr. President, but you broke it.

Most voters may not care a great deal about how unfairly Trump is treating the Mexican government, which actually has tried to slow the flow of migrants to the U.S. Many voters may not be worried about Trump’s increasingly dictatorial tendencies. But they will get angry when they realize that his moves are jacking up the prices they have to pay for food, cars and a wide variety of other goods.

After all, border security is important, but it’s summertime. Americans want their guacamole and mojitos—that’s part of the good life here.

The Wall Street Democrat

P.S. I welcome comments from my readers, which I treat confidentially. Please send your thoughts and comments to me at wallstreetdemocrat@gmail.com. Unfortunately, if you hit the “reply” button to the email with my WSD column, I won’t receive your comments. I regret any inconvenience for the extra step.

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