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Financial Planning > Tax Planning

Why Import Tariffs Won’t Boost the US Economy

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The White House has imposed billions of dollars of tariffs on imported goods in an effort to reduce the U.S. trade deficit and strengthen the U.S. economy, but according to two new analyses the tariffs will do neither.

A research report from the Federal Reserve Bank of New York argues that the tariffs will also reduce U.S. exports because of retaliatory tariffs imposed by countries that the U.S. has targeted and because many export companies depend on imported inputs for the production of their exports.

(Related: Have Trade Wars Put Commodities Back on the Investment Map?)

“Even if U.S. exporters switch to domestically produced inputs their costs will still rise because competing domestic suppliers will be able to increase their markups in the industries that are protected by higher tariffs,” notes the report. “The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficits.”

Analysts at the conservative Tax Foundation report that U.S. tariffs imposed on foreign imports have reduced long-run U.S. GDP by 0.06% and wages by 0.04%, but the decline will be far greater if the Trump administration imposes all the tariffs it has threatened, including levies on auto parts and additional Chinese goods, and countries retaliate, as they have threatened to do.

In that case, according to Tax Foundation analysts, U.S. GDP would slide 0.6% and wages 0.39%, and employment would decline by almost 466,000. That would effectively wipe out one-third of the 1.7% gain in GDP that the foundation has been expecting from the massive $1.5 trillion tax cut that took effect this year.

(Related: Trump Blasts Fed, Threatens to Put Tariffs on All Chinese Goods)

“The Trump administration would do well to not follow a path of imposing tariffs that could dampen the U.S. economic outlook,” the researchers conclude.

These are the tariffs that the U.S. has imposed so far:

  • 20% tariffs on imported washing machines and solar panels followed by 50% tariffs on washing machine imports after the first 1.2 million.
  • 25% tariffs on imported steel and 10% tariffs on imported aluminum from China, the EU, Canada, Mexico and Turkey.
  • 25% tariffs on $50 billion worth of Chinese imports in two tranches: $34 billion initiation and another $16 billion on Aug. 23, according to the U.S. Trade Representative’s Office

The U.S. has threatened to impose tariffs on another $200 billion of Chinese goods and double that if China retaliates in kind, essentially levying tariffs on $400 billion of additional Chinese imports.

On Friday, President Donald Trump threatened to extend tariffs on imported cars and double tariffs on imported aluminum and steel from Turkey to 20% and 50%, respectively. The latter threat contributed to the freefall in Turkey’s currency and financial markets, which is spilling over into global markets.

Foreign countries have retaliated against U.S. exports. China has matched 25% tariffs on U.S. imports and has threatened to impose comparable tariffs in a tit-for-tat with the U.S. It has also filed a complaint with the WTO opposing the U.S. proposal to impose tariffs on another $200 billion of Chinese imports. Canada, Mexico and the EU have also filed complaints with the WTO in response to U.S.-imposed tariffs and the U.S. has responded in kind with its own WTO filings.


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