The Supreme Court has agreed to rule on the legality of the tariffs imposed by President Trump under the International Economic Emergency Powers Act of 1977. Those tariffs have already been found unlawful by the Court for International Trade and the Court of Appeals for the Federal Circuit, by bipartisan majorities. If SCOTUS agrees, it will be a victory for delimiting presidential power within the rule of law.
Mr. Trump will surely come back with other tariffs promulgated under other statutes. Those would be less expansive and capricious, but they would nevertheless be anti-growth tax hikes. And just like the tariffs SCOTUS may strike down, the ones that replace them will be doomed to fail because of three dangerous and intractable internal contradictions embedded within the very ambitions that the Trump administration has for them.
The first contradiction is a consequence of believing that, as Mr. Trump has said, a tariff “has nothing to do with taxes to us. That is a tax on another country.” He has gone so far as to sign an executive order calling for an External Revenue Service to collect them. In reality, tariffs are not a tax the United States levies on foreign exporters – and surely Mr. Trump knows this – but rather a tax on American importers.
Let’s assume Mr. Trump is right, and that foreign exporters indirectly, but effectively, pay the tariffs by discounting their selling prices, or that whole foreign economies pay them by depreciating their currencies. It might be true: we ourselves made that case in these pages earlier this year.
But if that happens, the problem is that American importers will end up paying the same price for foreign goods after-tariff as they did before-tariff. So there would be no incentive for any American firm or consumer to stop importing and switch to domestically-made substitutes. That means there would be no mechanism by which tariffs would produce the result Mr. Trump claims: “Jobs and factories will come roaring back into our country.”
You can’t have it both ways. You can’t have foreigners pay tariffs, and at the same time have Americans “buy American” to avoid tariffs.
Now let’s hypothesize that American firms and consumers, not foreign exporters, pay the tariffs. Of course that would be a massive tax hike, with all the recessionary consequences of any massive tax hike. Beyond that, here is where the second contradiction arises.
If Americans pay the tariffs, then they would have an incentive to switch to domestically-made substitutes. That would point toward Trump’s goal of re-shoring American manufacturing. But to the extent that actually happens, the revenues to the Treasury from the tariffs will fail to materialize. Yet Mr. Trump claims, “… we're going to take in hundreds of millions of dollars in tariffs and we're going to become so rich you're not going to know where to spend all that money.”
You can’t have it both ways. You either get the revenues, or you get the re-shoring. Not both.
Which would it likely be? Thinking that through takes us to the third, and most dangerous, contradiction – and it shatters the claim by the Trump administration that the purpose of the tariffs is to be a weapon brandished in the negotiation of trade deals. Recall in April White House trade adviser Peter Navarro said, “We’ve got 90 deals in 90 days possibly pending here.” But it hasn’t turned out that way.
The main reason America imports so many goods from abroad is that they are cheaper. Tariffs – assuming that U.S. firms and consumers effectively pay them – raise the price of imports and make it easier for domestic manufacturers to compete. Let’s say a Chinese widget sells in America for $1.00, but a domestic manufacturer would require $1.20 to earn its required profit margins – so there are no domestic manufacturers. If a tariff moves the Chinese import price to $1.20, now a domestic manufacturer could be competitive again, and widget manufacturing gets re-shored. But the consumer is now paying $1.20 no matter which widget he buys. Across the economy, that’s an affordability shock with an impact that is likely to be both recessionary and inflationary.
Now raise the tariff, so that the Chinese widget has to sell for $1.50, and assume the domestic manufacturer is happy with his margins at $1.20. Now everyone will “buy American,” but there will still be the same price shock and recession risk, and on top of it the Treasury will get no revenues.
This is where the third contradiction comes in. Yes, manufacturing will have been re-shored. But the American widget maker is only profitable at $1.20, and the only reason he has an American market for his widgets at that price is because tariffs artificially price Chinese widgets much higher in America. But in the global market he is left a cripple who can’t compete with global prices.
You can’t have it both ways. You can’t make American manufacturers more competitive by shielding them from competition. You can only make them more expensive.
And that means you can’t use tariffs as a weapon to negotiate trade deals so that other countries will buy more U.S. manufactured goods. Those same tariffs – which so far, have been a part of every announced trade deal – make our domestic manufacturers globally uncompetitive.
The Supreme Court will rule on the lawfulness of the tariffs. But the court that will rule on the tariffs as economic policy is the U.S. economy. We fear its verdict may be rendered in the form of an affordability shock, a revenue shortfall, a more uncompetitive manufacturing sector and even a recession as the contradictions embedded in tariffs become tragically obvious.
