When you deeply believe something that's wrong

A supermarket analogy about the mostly harmful impact of tariffs

I’ve long said that other than his desire to “win”, Trump has almost no true beliefs. When it comes to politics, he seems to have two: He is against war (though seems to be far more willing than most people would have expected to order military operations, and who knows what’s next with Iran?). And he’s against trade generally, and specifically international trade where some nation’s manufacturers (or service providers) sell more to American buyers than American sellers sell to that country’s businesses and consumers.

(I worded it in that rather long and clunky way to make a particular point: Trade is not between nations. It is among people and their businesses.)

Mr Trump’s mindset is what used to be called “mercantilist”, a theory of international economics that was disproven around the same time that America was founded. (Adam Smith’s “The Wealth of Nations” was published in 1776.)

Because this is one of the only things Trump truly believes, he’s not taking the incredible gift of a tariff off-ramp just offered by the Supreme Court when they overturned his IEEPA “reciprocal” tariffs and instead is plunging ahead with, per Andy McCarthy, even more obviously illegal tariffs.

Trump’s Section 122 Tariffs Are Illegal | National Review

So let’s talk a little economics, and I’m going to try to do this by way of example rather than dry textbook discussion…

By way of analogy, are you upset that your supermarket or local hardware store don’t buy as much from you as you buy from them? What would it mean for you if you were only allowed to buy from Safeway or Home Depot the same dollar value of stuff that they bought from you?

Alternatively, imagine that you had two supermarkets available, Big Food and Large Grub, and Big Food was American owned while Large Grub was foreign owned. Because of smart supply chain management, most things at Large Grub are a little cheaper than at Big Food — let’s call it 3% on average — and their selection is also usually a little better.

And let’s say that on average you spend $100 per trip to Large Grub. Now let’s hypothesize that you have a president who desires to boost US-owned companies and claims the authority to impose a national sales tax of 10% on everything sold by foreign-owned supermarkets. (This is functionally the same thing as a tariff although in my hypothetical it’s imposed based on the seller rather than on the origin of the products being sold. If it makes you happier, just imagine that everything sold by Large Grub is imported.)

This is where it gets complicated. Large Grub knows that they’ll lose lots of business to Big Food if your bill goes from $100 to $110 because you can go to Big Food and spend $103 for similar stuff. Maybe not quite as good, but similar enough. So Large Grub will pressure their suppliers to eat some of the tax and Large Grub will absorb some themselves, and only pass along half, i.e. 5%, as a price increase to customers.

There are multiple losers here, though not everyone will be sympathetic to all of them. Obviously, the owners of the suppliers of the food products and the owners (shareholders) of Large Grub (which, if it’s public, probably include lots of Americans even if it’s a foreign company), will lose. The ripple effects through the economy and through reduced value of shares in people’s retirement accounts may be small, but non-zero. The suppliers of the food products will also lose due to reduced sales to the extent that people aren’t willing to pay 5% more, whether that reduction is due to their shopping at Big Food or simply reducing the amount they consumer.

The biggest losers, of course, are supermarket shoppers. Because your food bill will go up at least 3% (if you go to Big Food) or 5% (if you stay at Large Grub), or you will keep your spending constant but eat and enjoy less. (Or some combination of the two.)

It’s also worth noting that by artificially raising the price of stuff at Large Grub, it actually gives Big Food the ability to raise prices a little bit if they want to. They could go to being 4% instead of 3% above the prior Large Grub prices and still be slightly cheaper than the post-tariff price.

The big winner is Big Food, with customers being pressured by a politician to shop there when, if left to make their own choices, they would shop at Large Grub.

Now some will say it’s just patriotic for you to buy at the American-owned store and they don’t mind government forcing you to help that American business. But beyond the fact that, in my view, it’s immoral for a government to tell me that I can’t buy a legal product from a willing seller, it’s critical to remember That Which is Seen and That Which is Unseen.

And what is unseen is the secondary effects of the forced increase in prices at Large Grub. As noted before, either Americans will buy products they prefer less, or buy less of the products that they prefer, lowering our enjoyment of life — which seems like an inappropriate intentional use of government coercion and taxation. Or we buy what we were buying but spend more. Now I’m spending $105 for the food that used to cost $100. That means I have $5 less to spend on other things, whether other physical goods, or services, or vacation, or school for my kids, or retirement savings, or to start a business. And much of that $5 would have gone to American-owned businesses. So those businesses suffer lower revenue, lower profits, lower hiring rates, lower wages (or raises) and benefits for workers, or just go out of business.

This is why, for example, there’s been a small increase in steel manufacturing employment in the United States following Trump’s steel tariffs but a larger decrease in manufacturing employment in companies that use steel. If you think that manufacturing jobs have increased under Trump, you’d be very wrong.

Trump doesn’t understand any of this. Or, what would be worse, he does understand it but does it anyway. Politically, it’s easy because the beneficiaries are highly visible. The hypothetical president could wave around Big Food’s press release that they’re hiring 2000 more workers and opening 30 more stores. Of course, he wouldn’t wave around the Large Grub press release saying they’re laying off 2000 workers and closing 30 stores…and those are American workers. Trump (and other presidents who play the same stupid game) can stand in front of the steel mill and cheer about their running an extra shift and hiring several dozen workers. They’re very visible. But he won’t talk about the fact that every American who buys a new car now is paying $300 more per car. That it costs more to build a house, to buy a hammer, etc.

This isn’t complicated: Tariffs make us poorer as a nation. EVERY economist knows it. It’s not a particularly controversial thing. Just like any tax makes us poorer. Trump and his supporters twist themselves into (il)logical knots trying to make arguments that others pay the tariffs. Sure, some may be absorbed by smaller profit margins, but only Americans pay the tariffs. And, again, while increasing costs and leaving less money to be spent on other goods and services, they also reduce choice.

There’s no doubt that the tariff revenue offsets a very small fraction of our spending deficit, but the answer there is twofold: First, cut spending. Second, if you think it’s a good idea politically or economically to raise taxes, then make that case and pass it through Congress. Don’t break the law to impose illegal taxes and claim that foreigners are paying them.

Again, this is a particular problem right now because one of the only things Donald Trump deeply believes is that free trade is bad if it means we buy more foreign stuff than they buy of our stuff, even though that necessarily comes along with foreigners keeping our government afloat by buying US government bonds or employing Americans by opening factories.

By the way, just so you understand this key point: If Americans buy $5 billion of Toyota cars and Toyota opens a US division and spends $5 billion to open a factory in the United States — that would show up as a “trade deficit” of $5 billion. Efforts to eliminate the so-called trade deficit will necessarily reduce the ability of foreign nations to invest in the US. Again, it’s stupid policy.

Now, I do want to make clear that to the extent that foreign countries pass laws to “protect” domestic industries, whether we’re talking about tariffs or regulatory barriers to American goods, that’s bad for the US and we should lean on them to open their markets. Trump believes, and perhaps with some basis, that tariffs are good leverage to get them to do so.

But it’s critical to remember that while imposing taxes on certain imported goods will hurt the manufacturers and sellers of those goods, the consumer who now must pay more or perhaps lose access entirely to what she wants to buy is the real victim.

Even illegal (under international law) manufacturing subsidies which do hurt American producers of competing products also hurt the population of the country which diverts its resources into those subsidies.

As you can see, this is all much more complicated than Trump will admit.

And the game theory is tricky because Trump is playing the same game that the sheriff is playing in Blazing Saddles: hoping that people will believe that in order to get what he wants, he’ll be willing to hurt the United States. Imagine someone saying, “if you don’t do what I want, I’ll punch both of us in the face.” Or, even better:

Again, I get the idea: force other nations to open their markets. It’s a valid and laudable goal. But if the other nation is going to call your bluff, do you still pull the trigger knowing that the bullet will hit yourself as well as the other guy? And here’s the other thing: Since Trump is playing this same game against multiple opponents, he can’t back off his fundamental argument. Sure, he can make individual deals. But if he shows that he won’t go ahead with the tariffs if he can’t get a deal then all the other opponents will stop bending to his will. And so here we are.

It’s worth noting that trade economics are complex and often non-intuitive. It’s understandable why so many people get it wrong. It’s unfortunate that we have a president with very little understanding of economics (despite his followers thinking he’s an econ genius), and who won’t take the gift of a Supreme Court ruling against these harmful policies.