Some Conservatives Worry Trump’s Tariffs Could Surrender Tax Gains
Supporters of more aggressive economic policies like those of the chief executive maintain that trade war concerns are exaggerated
Unemployment is low and the economy is humming, but concern is growing among some conservatives that President Donald Trump risks giving away gains from his historic tax cuts in a trade war with China.
The conservative-leaning Tax Foundation earlier this week projected that the $150 billion in tariffs that Trump has proposed would cut gross domestic product (GDP) and wage growth by a tenth of a percentage point over the long run and reduce full-time jobs by 79,000. Middle- and lower-income taxpayers would absorb a disproportionate share of the hit, according to the analysis.
Erica York, an analyst at the think tank’s Center for Federal Tax Policy, wrote in a blog post that the tariffs “could potentially claw back many of the benefits that businesses and households” will receive under the Tax Cuts and Jobs Act (TCJA).
“Rather than playing a game of chicken with the U.S. economy, the administration should allow the TCJA to do its job and work with allies and the World Trade Organization to address unfair trade practices,” he wrote. “Tariffs will not make us more competitive.”
Many of the conservative analysts who were Trump’s allies in the fight over tax cuts agree. Grover Norquist, president of Americans for Tax Reform, is one of a number of conservative leaders who signed a letter recently urging Trump to reconsider his opposition to the Trans-Pacific Partnership (TPP).
Norquist told LifeZette that a tariff is a tax like any other and would have same impact of any tax.
“A significant trade war would give some of it back,” he said, assessing the effects on gains from the tax cuts. Norquist said the president will be proven correct if it turns out the threat of tariffs induces China to alter predatory trade practices.
The Chinese government has sent mixed signals on that issue, but Norquist added that Trump’s is a strategy fraught with peril because Chinese behavior is hard to predict.
“We’re not in control of it … I hope the president is right,” he said. “It could be a huge, huge win for the president personally and for the economy. But again, we don’t control it. It’s a risk.”
Trump gave hope to free trade advocates — and raised alarm among populist conservatives — when he reportedly told a group of lawmakers at the White House Thursday that he was open to restarting negotiations on the Trans-Pacific Partnership.
One of Trump’s first acts as president was to withdraw formally from the pact, negotiated by his predecessor, which would have bound the United States and 11 other countries in a free trade zone.
Would only join TPP if the deal were substantially better than the deal offered to Pres. Obama. We already have BILATERAL deals with six of the eleven nations in TPP, and are working to make a deal with the biggest of those nations, Japan, who has hit us hard on trade for years!
— Donald J. Trump (@realDonaldTrump) April 13, 2018
Trump backed off his reported comments, however, in a sharp late-night tweet Thursday.
“Would only join TPP if the deal were substantially better than the deal offered to Pres. Obama,” he wrote. “We already have BILATERAL deals with six of the eleven nations in TPP, and are working to make a deal with the biggest of those nations, Japan, who has hit us hard on trade for years!.”
Alan Tonelson, an economic policy analyst who favors a dramatic shift in U.S. trade policy, said the president’s tweet makes him less concerned that Trump is contemplating what would be a stunning flip-flop.
“He does seem aware that Obama’s TPP had major flaws,” he said.
Tonelson, founder of the RealityChek economics blog, said those flaws would be “extremely difficult to fix.” One major drawback, he said, is that it does little to combat nontariff barriers that many nations often erect to block imports of key products from the United States.
For instance, governments often provide subsidies to core industries and put up regulatory hurdles that are opaque and difficult for foreigners to navigate. Government procurement rules also often favor home-country companies, Tonelson said.
What’s more, the basic math of large, multilateral deals works against the United States, he said. He pointed to the dispute-resolution mechanism of TPP that gives each nation one vote.
Like the World Trade Organization and the North American Free Trade Agreement (NAFTA), such a setup greatly diminishes the influence of the United States relative to its outsized share of the world economy, Tonelson said.
In the TPP, that would mean Brunei would have the same voting power as the United States despite having an economy more than 1,600 times smaller.
“The claim that tariffs would greatly increase prices consumers would pay ignores the fact that we have an economy where very few companies, foreign or domestic, have pricing power.“
As to the argument that tariffs undo the impact of the tax cuts, Tonelson argued that most economists overestimate the effect.
“The claim that tariffs would greatly increase prices consumers would pay ignores the fact that we have an economy where very few companies, foreign or domestic, have pricing power,” he said.
Competitive pressures will force most companies to absorb all or some of the higher costs caused by tariffs, Tonelson argued.
He added that he remains skeptical that China will significantly change its mercantilist practices. Given the country’s size, he said, it would be too difficult to monitor and enforce those changes.
Tonelson urged the Trump administration to be more transparent.
“It hasn’t told the American people enough about its comprehensive game plan,” he said.