Published 8:49 AM EDT May 15, 2019
President Donald Trump’s seemingly chaotic trade policies, such as putting tariffs on Chinese imports and threatening tariffs on imports from our key European allies, cost Americans money through higher prices at home and lost export opportunities abroad. But if Trump’s goal is to make America a crony capitalist kleptocracy, where profits don’t depend on free markets but on cozying up to Trump, his trade policy makes perfect sense. Tariffs are one of the few areas where Trump can act unilaterally.
In theory, Trump will revoke his tariffs on Chinese imports in exchange for a mutually acceptable trade deal with China. But in his proposed trade agreement, Trump wants China to commit to specific purchases of certain categories of American goods — potentially allowing Trump to influence what U.S. goods China buys, and from whom.
Or in what’s increasingly the more likely scenario of no agreement with China, the net damage from Trump’s tariffs will be small enough and spread out enough that (with some big lies and the cooperation of Fox News) many Americans won’t attribute the damage to Trump. The benefits will be sufficiently concentrated, however, that those protected by his tariffs will enthusiastically support Trump. After all, their jobs, and profits, will depend on it.
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The San Francisco Federal Reserve estimated Trump’s tariffs on all imports from China will likely lead to a one-time increase in inflation, estimated at about 0.4 percentage point. However, inflation is a very diffuse tax. Trump supporters would have to notice these price changes, and attribute them to Trump’s tariffs, for this to impact him politically.
For example in 2018, Trump imposed a 20% tariff on imported washing machines. According to a study by researchers at the Federal Reserve and the University of Chicago, this increased the prices of washing machines and dryers (the increase was spread across both products, because they’re often bought together). Good news! Americans responded by buying more domestic washing machines, creating about 1,800 new jobs. Bad news! American consumers paid for the cost of the tariff. More bad news! The estimated cost of each of those new jobs was over $815,000 per year, for a total cost of $1.5 billion per year, paid by American consumers.
Shooting a chunk of the American economy
But when buying a washing machine, how many people compare this year’s prices with last year’s to even know prices increased? And how many of those noticing the price increase will understand that it resulted from Trump’s tariffs? Despite overwhelming evidence that American consumers will be paying for these tariffs, Trump keeps insisting the exporting country pays for them.
Trump’s tariffs will also have a negative effect on gross domestic product growth. The Tax Foundation estimated that Trump’s tariffs (both imposed and announced) along with projected foreign retaliation could produce a one-time long-term reduction in U.S. GDP of 0.75%, with the impact spread over several years. But because the real growth rate of U.S. GDP has averaged about 2.7% a year since 1978, Trump voters might not attribute slightly lower growth to his tariffs.
My bet is Trump’s not trying to convince the majority of Americans of anything. He won the presidency in 2016 with 46% of the vote, so he just needs to do something similar in 2020. (In the extreme case, it’s possible to win the presidency, through the Electoral College, with just 23% of the popular vote.) Because Trump helped convince many gullible voters that President Barack Obama was born in Kenya, he can likely convince them that tariffs are good and China’s paying the bill.
Or, as Trump said, "I could stand in the middle of 5th Avenue and shoot somebody and I wouldn't lose voters.” He seems to be testing this theory by shooting a chunk of the American economy.
While tariffs impose diffuse costs, they provide highly concentrated benefits. Trump will make clear to tariff beneficiaries that if they don’t support him and the Democrats win, they’ll lose their tariff protection.
Trump can use tariffs to bully
Moreover, other workers and companies (the ones that want tariff protection or just don’t want Trump’s interference) will get a clear message: They need to be nice to Trump.
If retaliatory actions by other nations harm identifiable groups within Trump’s coalition, he’ll ride to the rescue with aid packages (at taxpayers’ expense), binding recipients ever more closely to Trump. He’ll falsely claim the aid is coming from money paid by China — instead of acknowledging it’s coming from what amounts to a national sales tax. We’re already seeing this scenario play out with Trump’s bailout package for America's "Great Patriot Farmers."
In 2020, Trump will position himself as a populist and nationalist who stands up for the American worker. As for those Americans suffering because of his trade policies, Trump will blame China, prior administrations (for negotiating bad deals), or Democrats in Congress (for not passing bailout packages).
As H.L. Mencken said: “No one in this world … ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.”
Trump has built his career around Mencken’s advice, so don’t underestimate him.
Steven Strauss is a visiting professor at Princeton University's Woodrow Wilson School of Public and International Affairs, an economic development specialist and a member of USA TODAY’s Board of Contributors. Follow him Twitter: @Steven_Strauss