Edward Lotterman

No other Donald Trump economic proposal has raised as much controversy as his proposed 10% tariffs on all imports, with those from China to be taxed at 60%.

Unfortunately, U.S. media covering the campaign fall into the trite and misleading argument of, “who will pay, China or U.S. households?”

Trump asserts that “China” will pay “everything” with no explanation of who exactly in China nor just what exactly “pay everything” means. In any case, Trump is flat wrong.

But so are the polar opposite, supposedly economic, views.

Fact-checking journalists say Americans will pay the tariffs — through higher prices on imported goods. MSNBC’s Lawrence O’Donnell is extreme, asserting, “A tariff is imposed by the United States of America and is paid for by people of the United States and no one else ever.” This is as silly, and as vague, as Trump’s argument.

Both sides are caught in a “false dichotomy,” the error in logic of assuming that only two possible answers to a question exist, one right, the other wrong. In fact, in this case, there are many.

Rather than “who pays,” the relevant economic questions here are, “who will gain or be better off because of the tariffs? who will lose or be worse off?”

There are myriad different groups in the United States, China and other countries that would be affected by higher U.S. tariffs. Many people will be affected in more than one way and often in conflicting directions. Their outcomes will stretch along a spectrum from large pure gains to large pure losses, with most falling somewhere in the middle. That is as true for China and the rest of the world as for us.

And yes, losses to societies will outweigh gains. But a deeper appreciation of the dynamics that will play out is vital.

Start by understanding that the imposition of significant import tariffs by the largest economy in the world would affect the entire global economy. Relative prices for inputs and outputs will change everywhere. All economies will need to adapt to such new realities.

If a 60% tax on imports went into effect, prices of consumer goods in our nation would rise sharply. Yet Americans would not keep on buying exactly the same set of goods as before. Spending would move, however subtly, away from tariffed items to non-tariffed ones.

Moreover, production in third-party nations, even those facing a 10% U.S. tariff, would ramp up. Production of goods requiring low-skilled, low-wage labor would shift even more from China itself to other developing countries. Such a shift to Southeast Asian nations like Vietnam, Malaysia, Myanmar already has taken place as well as to Central American and now West African nations. Across many products, a prohibitive wall against China would benefit rapidly growing India.

Similarly, production of affected goods in our country would rise or restart. There would be increases in employment sectors that produce substitutes for imported items and greater use of other U.S.-produced goods needed by factories. So some people here and in third-party countries could be better off. Many Chinese might be worse off.

Such adjustments take time. Reactions in the short term can only be limited, and extreme price spikes here might prevail at first. Product prices would be higher, but not by 60%.

Economists generally agree with Trump that tariffs will increase domestic production. But it is only by making prices higher. The degree to which production goes up or down with price changes depends on the “elasticity of supply,” the percentage changes in the quantities produced in response to given percentage changes in prices. In the short run, the supply of most goods is “inelastic.” Output does not grow much even if prices spike. But as the adjustment period goes on, production does rise with higher pries, although the degree of increase varies greatly from product to product.

Nearly all media discussion is about the prices of finished consumer goods. But 10% and 60% Trump tariffs would apply also to “intermediate goods” like steel, glass and plastics or components like computer chips, motors, switches, valves or pumps used in manufacturing finished goods.

We have much experience with steel tariffs. When higher ones increase our domestic price of steel, U.S. production rises. On the supply side, employment in mills grows. They use more ore, electricity and other inputs.

However, with higher-priced steel, industries that use it as an input see costs rise. They must charge more for what they produce, think washing machines and cars. Quantities they can sell drop.

But consider products we don’t buy, but in which steel is a high fraction of total production costs. Farming equipment, construction machinery and locomotives are prime examples of products whose prices will rise even if few or none are imported. Moreover, these finished business-to-business goods are all important U.S. exports. Such sales abroad inevitably drop when our costs rise relative to those of competing producers abroad.

U.S.-based companies themselves may do the shifting. Caterpillar and John Deere both manufacture here and export from here. But Deere also has plants in at least 25 other countries. Cat also has many plants abroad, including several in Brazil, with 5,000 workers at its main plant in Sao Paulo.

These produce almost entirely for the regions in which they are located or for non-industrialized importing nations, rather than shipment back here. So at the margin, if U.S. multinationals like these face higher materials costs at U.S. plants because of Trump’s tariffs, they will produce less here. Instead of exporting from our country, they will service international clients from factories abroad. So new U.S. tariffs would make Brazilian workers better off, U.S. workers worse off.

All this doesn’t take into account that other nations around the world certainly would respond to a unilateral boost in U.S. tariffs exactly as they did to the disastrous Snoot-Hawley tariff of 1930. They will charge reciprocal import duties on products we sell to them. The idea of “normal trade relations” with equal treatment for all other nations will be abandoned. Others will tax our exports while leaving tariffs alone in goods from the rest of the world. This would put the U.S. at a disadvantage.

Thus Boeing, in addition to paying more for the aluminum and components, would then face a tariff-induced price differential relative to competitors. U.S.-manufactured airplanes would be hit with tariffs that Europe’s Airbus, Canada’s Bombardier and Brazil’s Embraer would not face.

Analogous adjustments would affect medical devices. If chips and other electronic components now sourced abroad cost more, some production for global customers will shift to factories abroad.

Agriculture is an interesting case. It is the U.S. sector that has benefited most from greater global trade freedom over the last 50 years. Exports make up a very large fraction of total sales. But farm products are “fungible.” A customer does not care whether a bushel of soybeans or corn comes from Iowa or Parana, in Brazil. Thus when Trump imposed tariffs on China when he was president (ones that Joe Biden has left in place), China bought less farm goods from us and more from our competitors. However, our corn, beans, wheat and cotton flowed to importing countries that would have bought from those now selling to China. Total world consumption, volumes and prices moved little.

Much more could be said. Some Americans would gain from tariffs, and some would lose. A person glad to have a new steel mill job would also pay higher prices for clothes and housewares. But economic theory and historical experience are pretty clear. Gains by some will be less than losses to others. The U.S. economy as a whole will use resources less efficiently. Thus there will be “dead-weight losses.” The same will be true for China and the rest of the world.

The issue of whether any president could impose such sweeping import taxes on their own is vital but little discussed. Constitutionally, a president cannot decree any tax, and tariffs are taxes. But Congress has ceded its tariff authority to the executive branch for a few special cases. Trump might get away with bullying through those loopholes.

There also is the issue of how multimillion-dollar business- and finance-sector contributors to Trump’s campaign would view such a huge shake-up of the global economy snow globe. I think they would look askance. But you get what you pay for, whether you like it or not. These and other issues must wait for future examination.

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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.