Why Economists Hate Trump's Tariff Plan

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Before we get into tariffs—the heart of the Donald Trump economic plan—we should talk about the chicken war. The chicken war is a cluckin' good story. In post-World War II West Germany, people started eating a lot of chicken, specifically American chicken. By midway through 1962, U.S. farmers were on track to sell more than $50 million worth of chicken, which would be half a billion in today's money. This made European farmers mad, so the organization that later became the European Union put a tariff on chicken. A five-pound chicken that initially cost $1.60 ended up at $2.25. Imports quickly dropped, and U.S. chicken farmers and politicians were furious. They thought, "Germany is our big market for chicken, and if we hurt the Germans, maybe they'll change their mind on chicken."

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The U.S. then imposed a 25% tariff on trucks, specifically targeting German brands like Volkswagen, and it worked. German truck sales in the U.S. fell by half, and they never really recovered. Meanwhile, Germans paid more for their chicken, and Americans had fewer truck options. This story is a perfect example of what tariffs do: they can harm consumers while protecting very specific industries or attempt to get countries to change their behavior.

While tariffs haven't been a significant part of trade policy in decades, former President Donald Trump sought to change that. “Some might say it's economic nationalism. I call it common sense. I call it America First.” President Trump brought tariffs back into the discussion, suggesting they could be a useful part of America's economic strategy.

Here's how tariffs work and what Trump's proposals aimed to do. In 2018, Trump imposed tariffs on items like washing machines. “We’re going to benefit our consumers and create a lot of jobs,” he said. Since then, whenever a washing machine is imported to the U.S., the U.S.-side importer pays a tariff to the U.S. government. The importers, with low profit margins, had to pass on the cost to consumers, raising prices. The intention was to reduce demand for foreign goods and create space for domestic producers.

Following the tariffs, prices for both imported and domestically made washing machines increased. There’s a common myth that taxing imports won’t affect domestic prices, but the increased demand for local products drove up prices. Surprisingly, the cost of dryers also increased, despite them not being tariffed, as consumers often buy washers and dryers together. The tariffs indirectly influenced dryer prices due to shifting demand.

Not all outcomes were negative. The tariffs helped create jobs, notably around 1,800 positions from companies like Samsung and LG opening plants in the U.S. A study found the U.S. collected $82 million annually from these tariffs. However, consumers paid $1.5 billion more due to price hikes, translating to roughly $815,000 per job created. Many economists argue that there are more cost-effective ways to stimulate job creation.

The 2018 tariffs didn’t stop with washing machines. Major tariffs were also imposed on steel and aluminum, aimed at penalizing China for violating trade norms and protecting materials critical for national security, like military supplies and vehicles. However, higher steel prices impacted all U.S. industries that rely on steel, squeezing their profit margins and disadvantaging them against foreign competitors who don’t face those inflated costs. Numerous studies revealed that downstream industries reliant on steel lost as many, if not more, jobs than the upstream industries protected by tariffs.

While studies on the 2018 tariffs show mixed results, with some manufacturing jobs stabilizing rather than declining, the broader economy lost jobs, mainly in downstream industries. The cost of tariffs was ultimately passed onto U.S. businesses and consumers. Yet, tariffs did motivate some U.S. companies to move operations out of China and made supply chains more resilient, though they didn’t significantly alter China's actions and, in some respects, made China more assertive.

The Biden administration’s review of the 2018 tariffs concluded that some should remain and possibly increase, which they did. Once implemented, tariffs are tough to remove due to domestic interest groups benefiting from the extra market share and the tariffs’ value as a negotiating tool. This is evident in the 25% tariff on trucks from the chicken war, which remains today, even though U.S. chicken farmers no longer focus on the European market. The chicken war shows how tariffs, intended for short-term reasons, can persist for decades.

Trump’s second-term plan involved dramatically reviving tariffs, with a proposed 60% tariff on imports from China and 10-20% on goods from other countries. Studies estimated the impact: it could cost U.S. households an extra $1,700 annually due to price increases and result in over 684,000 job losses. Moreover, domestic goods might become more expensive, and other countries could impose retaliatory tariffs. Foreign nations wouldn’t sit idle and may respond, impacting both U.S. imports and exports.

Trump intended to use these tariffs to fund tax cuts. “Whereas tariffs on foreign countries go up, taxes on American workers and families come down.” Studies estimate that Trump’s proposal could generate roughly $250 billion annually, around 5% of current federal tax revenue.

China remains a significant focus for Trump. Over the past 20 years, China’s heavy investments in manufacturing have positioned it as the world's leading exporter, often underpricing goods like steel and aluminum. Trump’s tariff strategy sought to counter these developments. The Biden administration has continued these efforts, highlighting a shift in global trade policy towards more active industrial policy, tariffs, and subsidies, reflecting a drastically changed geopolitical environment.

Trump’s proposed tariff policy would mark a significant shift, potentially resulting in economic hardship in the short term and uncertainty in the long term. The question remains whether it will lead to economic tensions between the U.S. and other countries or an intensifying standoff with China. Trump, ultimately, seems ready to engage in a “game of chicken” to find out.