If there was any doubt about Donald Trump’s tariff plans before, there shouldn’t be now. He will keep his promise to raise tariffs on goods crossing American borders as soon as he takes office:
“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States.”
Trump also amplified his intention to add an additional 10 percent to tariffs on goods from China.
Yes, the “Tariff Man,” as he likes to style himself, is back in town, and the pros and cons of his approach — continued mainly by President Biden — have been on display for years. Yet, anytime government sausage is made, there are ingredients we can’t easily see.
More than reinforcing an America First promise to protect U.S. industries and jobs, Trump presents his latest tariff foray as about bargaining. He indicates he will reduce the newly imposed tariffs when the affected countries eliminate shipments of drugs and illegal immigrants into the United States.
Anyone who has looked closely knows that border taxes do serious collateral damage to U.S. firms that rely on imported materials to manufacture American goods. They can also impose burdensome costs on firms of all sizes caught in a competitive struggle to survive, either against better-protected rivals or in a market made less free and friendly.
Indeed, since Trump’s announcement, concern about retaliation and an expanded trade war has surfaced. For this, the tariff process provides potential relief. Those who anticipate economic pain can petition government trade managers for an exemption. Experience tells us that these requests will keep Trump’s trade office busy.
According to news reports, the Office of the U.S. Trade Representative handled 50,000 exemption requests for Chinese tariffs in Trump’s first term. The Department of Commerce received 500,000 requests for exclusions involving steel and aluminum. Such a process would give any president awesome power to reward friends and punish enemies.
Recent research in the Journal of Financial & Quantitative Analysis found that this happened in Trump’s first term. The researchers focused on lobbying activities associated with the tariffs imposed on products imported from China between 2018 and 2020. Using statistical analysis, they examined $550 billion of imports facing an average 20 percent tariff, including 1,022 cases where exemptions were granted and 5,993 cases rejected.
The authors found that campaign contributions and lobbying expenditures matter. As one put it, “Our findings reveal that politicians not only use exemptions to reward their supporters but also withhold exemptions to punish supporters of their opponents. The tariff exemption grant process functioned as an effective spoils system allowing the administration of the day to reward its political friends and punish its enemies.”
Intentionally or not, the ability to levy and exempt firms from tariffs concentrates power in the person of the president and the executive branch. Such power can certainly assist the returning president with his well-established preference for micromanaging the economy.
There was a time when regulatory scholars tried to explain the behavior of politicians and regulators by focusing on a “public interest” theory. It argued that while there might be occasional slip-ups or even corruption, politicians involved in developing and managing regulations are primarily driven by a desire to serve the broad public interest. They want to make the world a better place.
In 1971, this theory could no longer explain the growth in regulation, and Nobel laureate George Stigler offered an alternative theory — an economic one. It said to keep your eye on the money and you will better predict regulatory outcomes. Whatever the intentions of one politician or another, regulation usually ends up serving highly organized private interests in addition to addressing public interest concerns.
We have no reason to doubt Trump’s belief that high tariffs, with all the potential payoffs and punishments, are what’s best for America. The Tariff Man is nothing if not steadfast. However, plans like these rarely discuss what’s best for all Americans. The old public interest theory doesn’t predict very well.
