By Michael Hicks
Guest Columnist

MUNCIE — Tariffs and trade are rarely explained in a way everyone can understand, and we should blame economists for that. There are a few important points that every adult should know.

Michael J. Hicks

Tariffs are taxes levied on imported goods and services. Our constitution requires Congress to vote on all tax changes, but Congress gave special powers to the president to set tariffs under a “national security” claim. So, as long as the president claims the tariffs are designed to reduce the risk to national security, he can set tariffs.

This presidential power was created in 1962 and has been used only a few times. President-elect Trump imposed very broad tariffs in 2018, and President Biden continued them throughout his presidency.

Because these tariffs are not subject to normal policy debates, few Americans know about their effects. That’s a pity because it permitted Trump to impose heavy and costly tariffs and allowed Joe Biden to keep them.

Tariffs are designed with the hope of pushing down our trade deficit, but they don’t have any effect on our trade deficit. The size of the American trade deficit — how much more we import than export — is exclusively the result of the savings rate, or how much more we spend than we produce.

It turns out that the U.S. savings rate is primarily affected by our federal budget deficit. You see, our federal budget deficit is caused by collecting fewer tax dollars than we spend each year. It is a classic example of spending more than we earn. To finance that, we sell Treasury bonds. This is a type of borrowing that reduces our national savings rate.

In short, Americans are buying more than we produce, and that has caused our trade deficit.

American citizens buy up about a third of the federal deficit each year in the form of bonds. These bonds are held by retirement accounts and pension funds as a safe investment, so we are lending money to our own government. But, for every dollar that we borrow from outside the U.S. each year, American net imports must increase by a dollar.

For example, last year, our federal deficit was about $1.4 trillion, and roughly $1 trillion was financed by foreigners buying U.S. treasuries. As a consequence, the trade deficit was roughly $1 trillion. This is what mathematicians call an identity, such as 2+2=4.

Unless we collect enough money in tariffs to pay down the debt, tariffs will have no affect on our trade deficit. As long as we run federal budget deficits, we will have a trade deficit, and every American should understand that relationship.

Tariff rates would need to be about 150% to eliminate the budget deficit — if we still bought the same number of goods from overseas.

Now, tariffs can affect what we buy, and from whom we buy it. So, tariffs on the People’s Republic of China would push domestic firms and consumers to buy goods or services from other countries. This happens because of the price effect of tariffs. Tariffs will increase the price Americans pay on imported goods. You cannot control the incidence of taxation.

No matter what laws you pass, or what claims you make about a tax, the entity that pays a tax on trade is determined by economics, not legislation. The relative responsiveness to price of the buyer and seller determines who pays the tax.

We are a rich country, importing relatively inexpensive items from overseas, so our price sensitivity is very low relative to our suppliers. As a consequence, American consumers will pay most of the tariff costs.

Ironically, retaliatory tariffs on American exporters can be very damaging. We export lots of commodities — think soybeans, corn and oil. These products are produced in many places, so it is very easy for a country upon whom we place a tariff to retaliate by placing a tariff on our soybeans, corn and oil. In that case, almost all the tariffs will be paid by American farmers and oil producers.

Trade wars are not easy to win, and they are darned near impossible to win for rich countries that export commodities. We lost the last one and will lose the next one. And by “we,” I mean all of us, though the cost will be more heavily born by U.S. farmers and manufacturers who import parts to assemble here.

That is why the Midwest, with its farms and factories, was so badly hurt by the 2018 round of tariffs.

Trump’s proposed tariffs will cause the cost of products to rise in the U.S. and at least one estimate from the Tax Foundation estimates the cost at more than $2,000 per household each year. That would make this the largest inflation-adjusted tax increase in U.S. history.

The burden of tariffs will also fall most heavily on younger and poorer households. They buy a disproportioned share of goods, such as cars, appliances, consumer electronics and home construction materials.

Tariffs played such a large role in the Trump campaign that arguing against them is pointless. What would be best for the U.S. is to experience them quickly and in full. We should immediately proceed to levy a 20% tariff on all imports and 60% on Chinese imports, as Trump said he would do.

As we learn of the consequences, we should recall Benjamin Franklin’s adage that experience is a costly school, but the fool will learn in no other way.