Donald Trump doesn’t understand trade. Donald Trump doesn’t understand trade deficits. Donald Trump doesn’t understand tariffs. And his ignorance has led to Donald Trump instituting a policy that is a massive tax increase on the middle class.
First, let’s set the table of examining Donald Trump’s ignorance by looking at his misunderstanding of trade deficits:
The United States has a trade deficit because the United States is the wealthiest country in the world. We use that wealth to buy stuff. The trade deficit exists because we buy more than other countries buy. Bringing down the trade deficit would be an indication that we are getting less wealthy with relation to the rest of the world.
Trade deficits are not a bad thing. They simply mean we are getting more stuff by sending out less stuff. They are a sign of a wealthy country.
The other ridiculous aspect of all of this is that Donald Trump’s proposed solution to the non-existent problem of trade deficits is a trade war that will do nothing about the trade deficit. All it will do is reduce the amount of overall trade. We may import less, but we will also export less. In fact, so far, Trump’s trade war has only increased the trade deficit he keeps griping about.
New data out Wednesday showed the U.S. trade deficit in July widening at its fastest rate since 2015 as monthly deficits with China and the European Union both hit new records. In the year so far, the U.S.’s overall goods and services deficit is up by $22 billion, or 7 percent, versus the same period last year.
So, Trump’s trade war is actually widening the trade deficit he wants to decrease (for no good reason).
Trump’s fundamental ignorance about trade has led to him instituting tariffs on goods that are imported into the United States. And his understanding of tariffs is even more ignorant than his understanding of trade deficits. He thinks a tariff on goods imported from China means that China, the country, pays the tariff to the United States.
President Trump is vowing that his latest round of tariffs will help win a trade war, adding that China is “now paying us billions of dollars in tariffs.”
This is an astoundingly ignorant statement by Donald Trump. China does not pay the tariffs. Companies that import the goods, mostly American companies, pay the tariffs. And these companies pass on the cost of the tariffs to consumers. Tariffs work almost exactly like a sales tax. And everyone knows that it is the consumer that pays the sales tax, not the company selling the product. Companies make sure that people know that by noting the sales tax amount on receipts each time you buy something. They want you to know that they sold you the good for one price, then you paid a little more because of a sales tax that was charged by the government. The only difference between a sales tax and a tariff is that the tariff won’t be separately indicated on your receipt. But, the net effect is exactly the same. You are paying more for the product because the government is adding on an extra cost, in the form of a tax.
And thanks to Trump’s tariffs, companies are starting to do exactly that: add the extra cost of the tariff into the price of the product.
“According to the Labor Department, the average cost of washing machines was up 17 percent in just the past three months,” The Wall Street Journal reported.
Citing steel and aluminum tariffs Trump announced earlier this year, Coke said on July 27 it would be raising the price of its sodas.
Winnebago, Polaris Industries (maker of motorcycles and snowmobiles), Whirlpool, General Motors, Miller-Coors, Samuel Adams, Campbell’s Soup and Toyota are each affected by Trump’s tariffs on steel and aluminum and will be raising their prices.
On August 15, Kimberly-Clark, the parent company of Huggies and Kleenex, announced it would be raising prices in the “mid-to-high single digits” on core products to offset rising commodity costs, specifically price increases in hardwood and softwood pulp, which are used to make diapers, tissues, and toilet paper.
In a recent earnings call, however, COO Michael Hsu alluded to US tariffs as another pressure contributing to price hikes.
“When you have a commodity impact as large and significant as it is right now, I think our customers understand that. And we do have to recover and improve our net revenue realization. And so we are going to take the appropriate actions,” he said in July, CNBC reported.
“This round of tariffs could impact a significant number of common consumer items that are not easily replaceable,” Sarah F. Thorn, a senior director for global government affairs at Walmart, wrote in a Sept. 6 letter to the U.S. Trade Representative. “The immediate impact will be to raise prices on consumers and tax American business and manufacturers. “
The impact of President Donald Trump’s escalating tit-for-tat over tariffs is already being felt, say auto industry experts. New car prices are beginning to rise, and auto exports are dropping. But a new report warns that sales could plunge by as much as 2 million vehicles a year, resulting in the loss of up to 715,000 American jobs and a hit of as much as $62 billion to the U.S. GDP.
It’s not as if it is an unknown concept that tariffs are a tax. This concept has been well known for centuries. Donald Trump’s own Director of the National Economic Council, Larry Kudlow even wrote as recently as March of this year that tariffs are a tax:
One of the ironies of trade protectionism is that tariffs and import quotas are what we do to ourselves in times of peace what foreign nations do to us with blockades to keep imports from entering our country in times of war.
In other words, steel and aluminum may win in the short term, but steel and aluminum users and consumers will lose. In fact, tariff hikes are really tax hikes.
Since so many of the things Americans consumers buy today are made of steel or aluminum, a 25 percent tariff will likely get passed on to consumers at the cash register. This is a regressive tax on low-income families.
Republican Senators who have voted along with everything Donald Trump wants, like Orrin Hatch, also know that tariffs are a tax.
“My position remains unchanged: Tariffs on steel and aluminum imports are a tax hike on Americans and will have damaging consequences for consumers, manufacturers and workers,” Hatch said in a statement.
And who is going to pay most of this tax? The middle class will pay it. The American middle class is the largest consumer spender in the world. Tariffs are a direct tax on consumer spending. And this middle class tax increase is huge. Trump has now instituted $245 billion in new tariffs, the brunt of which will be passed on to the American consumer. All while the 2017 GOP corporate tax cut has done almost nothing for the middle class, instead being used by companies to plow their tax savings back into company stock in the form of nearly $500 billion in stock buybacks (just so far), which benefits only stock shareholders. And 85% of all stock ownership is in the hands of the top 10%.
The rich are getting a huge windfall from the GOP corporate tax cut, while the middle class is being asked to pay billions more in extra taxes through the form of tariffs. This isn’t even trickle down economics. This is worse. This is straight up class warfare. And the middle class is again on the losing end.