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An economist's take on Trump's 'ring around the collar' idea
Apply an across-the-board 10% tariff on imports, and here's what will happen.
By Jacqueline Brux
August 28, 2023 at 10:30PM
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Donald Trump met recently with the former head of his National Economic Council, Larry Kudlow, to plan out a global trade strategy for Trump's 2024 presidential run. The outcome of their talk is what Trump calls a "ring around the collar" of the U.S. economy. Since trade policy is easily misunderstood by non-economists, I think it's time for a basic economic lesson on trade strategy that can be clearly understood by everyone.
Trump wants a 10% tariff on all goods coming into the United States. He has never understood that the importer of a good (the U.S.) and ultimately its constituents (the American people) pay the tariff, not the foreign country. It is a tax we pay to the U.S. government in the form of higher prices for the product. Yes, higher prices — inflation on steroids — and as we'll see, unemployment.
The effects of such a tariff include the following: 1) stagflation, 2) a drop in U.S. exports, 3) a decline in the value of the dollar, 4) retaliation by trade partners and 5) a long-term loss of our export markets. Let me explain:
- When prices of imported inputs into the production process rise (via the tariff), the cost of the U.S. product rises as well. If the industry is one where market power exists in the hands of dominant producers (such as the U.S. automobile industry), prices of the product rise even further. As prices rise, consumers buy less of the product. Stocks pile up and production drops in response. Workers are laid off. Unemployment rises. A combination of high inflation and high unemployment is a worst-case scenario of stagflation.
- Higher prices of U.S. goods means our exports fall. Why would those in foreign countries buy U.S. products that can be purchased more cheaply from another country? As exports fall, stocks pile up and production and employment fall once again in response.
- A decline in demand for our exports by foreigners means a decline in the foreign demand for dollars with which to pay for these exports (the foreign importer must pay in U.S. dollars). A drop in demand for dollars means a decline in the value of the dollar relative to foreign currencies, or in other words, a rise in the value of foreign currencies relative to the dollar. This means Americans must pay more for imports (in terms of more dollars), continuing the inflationary spiral. Hence the initial rise in unemployment and inflation continue to climb.
- Furthermore, foreign governments will retaliate with similar tariffs, setting off trade wars that preclude any of the imagined populist benefits that Trump and Kudlow think they might achieve.
- Finally, the U.S. will never again be trusted as a reliable trade partner. Just like Trump's derision of the North American Free Trade Agreement (NAFTA) led to a loss of U.S. agricultural export markets even before he withdrew from the agreement, his talk of a 10% tariff will do the same. These markets are not acquired easily, and once lost, they do not easily return.
A "ring around the collar" would devastate the U.S. economy and render havoc to the global economy. A mere proposal at this point, or even a discussion of such a proposal, has likely already begun spinning the wheels toward instability. Please do not fall for this type of populist economics. While it might sound good to those who want to punch out the rest of the world, it is misinformed, unfounded in economic theory and proven to harm our economy.
Jacqueline Brux is an emeritus professor of economics, University of Wisconsin-River Falls, and author of "Economic Issues and Policy, 8th"; "A Populist, a Pope, and the Soul of a Nation"; and the upcoming "The Happiness and Unhappiness of Norwegians and Americans and Everyone In-Between."
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