Why Economists Hate Trump's Tariff Plan | WSJ

- [Speaker] Before we get into tariffs,- - The heart of the Donald Trump economic plan. - [Speaker] We should talk about the chicken war. - The chicken war is a cluckin' good story.

- [Speaker] In post World War II, West Germany, people started eating a lot of chicken, specifically American chicken. Midway through 1962, US farmers were on track to sell more than $50 million worth, half a billion in today's money. This made European farmers mad.

So the organization that later became the European Union put a tariff on chicken A five pound chicken that started as $1. 60 became $2. 25.

Imports quickly dropped. US chicken farmers and politicians were furious. - And we thought, Germany's our big market for chicken.

And so if we hurt the Germans, maybe we'll get them to change their mind on chicken. - [Speaker] So the US put a 25% tariff on trucks like Germany's Volkswagen and it worked. Their truck sales in the US fell by half, and they never really recovered.

Meanwhile, Germans paid more for their chicken, and Americans had fewer truck options. It's kind of a perfect example of what tariffs do. Hurt consumers while protecting very specific industries or attempt to get countries to change their behavior.

While they haven't been a large part of trade policy in decades, former President Donald Trump wants to change that. - Some might say it's economic nationalism. I call it common sense.

I call it America first. - President Trump has really sort of brought a lot of people out to think that tariffs might be something that's useful in America's economic arsenal in a way that hasn't been used in the past. - [Speaker] Here's how tariffs work and what Trump's proposals would do.

Let's start in 2018 when President Trump put tariffs on- - Washing machines. We're going to benefit our consumers and we're gonna create a lot of jobs. - [Speaker] Since then, whenever a washing machine is imported to the US, the company on the US side doing the importing pays a tariff to the US government.

- Their margins are pretty low. They've gotta pass that price on to consumers who ultimately pay it. That's the whole point in some sense, to reduce demand for those goods and create space for domestic producers.

- [Speaker] After the tariffs, not only did the price of imported washing machines go up, so did the ones made in the US. - There's this myth out there that if we tax imports, domestic producers won't change their prices. And that's not the case.

You're creating more demand for them. - [Speaker] So naturally the price goes up. And it wasn't just washers.

Drers went up in price too, even though they weren't part of the tariffs. - Usually it's the case, if you buy a washer, you buy a dryer. So even though dryers weren't directly affected by the tariff, they were indirectly affected by the shift in demand.

- [Speaker] Now, it wasn't all bad. These tariffs did- - Create a lot of jobs. - [Speaker] About 1,800, mostly from those foreign companies like Samsung and LG opening plants in the US and a study found the US collected $82 million annually.

But because of those price increases, it cost consumers 1. 5 billion more. So they basically paid $815,000 per job.

- This is a very expensive job creation program. And so that's one another reason why economists don't like tariffs. They're much more cost effective, more efficient ways of increasing employment in those industries.

- [Speaker] These weren't the only tariffs Trump created in 2018. The big ones were on- - Steel and aluminum. - Those were really designed to punish China for its transgressions of international trade rules.

- [Speaker] Also for national security. They're used to make a lot of military equipment, but also everyday things like cars. - All the industries that use steel have to pay the higher price that squeezes their profit margins.

And it also puts them at a competitive disadvantage against foreign producers of those same goods who don't have to pay those inflated costs for their inputs. And so a lot of studies have shown that you lose jobs as many if not more jobs in those downstream industries as you gain in the upstream industries that are being protected by the tariffs. - [Speaker] Many studies on the 2018 tariffs found some pros, some cons.

Manufacturing jobs, which were on the decline didn't increase, but they did level out. The overall economy lost jobs mostly in those downstream industries, and the cost of the tariffs were passed on to US companies and consumers. So not great for the economy, but it did motivate US companies to move out of China and made supply chains more resilient.

But it didn't change much of China's behavior and in many ways they became more aggressive. But here's the thing, even with all the economic downsides, a review by the Biden administration suggested Trump's tariffs should remain and the administration should add or increase them, which they did. - Once tariffs get in place, there are two factors that sort of keep them in place for some time.

- First of all, they're gonna be domestic interest groups that have a stake in seating those tariffs maintained 'cause they like the extra market share that they've gained as a result of those tariffs. And second of all, tariffs are a bargaining chip. So why would we sort of unilaterally get rid of these, even if there's some economic benefits when we might use it in some negotiations down the road, - [Speaker] Tariffs are really hard to remove.

It's why 60 years later there's still a 25% tariff on trucks, even though US chicken farmers no longer care about selling in Europe. - So we're still living with the legacy of the chicken war. So that's sort of another lesson of history is you have to be careful about imposing these tariffs because you think you're doing it for short term strategic reasons or you're just helping out this industry temporarily.

But they can last for decade upon decade upon decade. - [Speaker] Tariff policy is kind of old. Even by the chicken war, they were only imposed on around 7% of US imports.

Trump's plan for a second term is to bring them back dramatically. - This is the policy that built this country and this is the policy that will save our country. - [Speaker] He's proposing a 60% tariff on everything from China and a 10 or even 20% on every importer from every other country.

- Countries are gonna finally, after 75 years, pay us back for all that we've done for the world. - [Speaker] Multiple independent studies looked at the possible effects. One found it would cost the average American household $1,700 from higher prices.

Another found it could cost more than 684,000 jobs. And they don't factor in how domestic goods might get more expensive or retaliatory tariffs from other countries. - They're not gonna take that this lying down.

They're not going to change their behavior in some way to appease the administration that imposes such tariffs. They're going to retaliate. So not only will US import shrink, but US exports will shrink as well.

- [Speaker] Trump wants to use these tariffs as a revenue stream for the US to pay for tax cuts. - Whereas tariffs on foreign countries go up, taxes on American workers and families come down. - [Speaker] Studies found his proposal would likely bring in around a quarter of a trillion dollars per year, about 5% of what the federal government currently brings in with taxes.

So if tariffs are harmful, always harmful even to the economy, why is Trump so focused on them? In the last 20 years, China has gotten aggressive investing in manufacturing to become the world's largest exporter. Even today, they invest more than any other country.

It has let them export things like steel and aluminum at below market values. That coupled with numerous trade rule violations- - Allowed President Trump to really restart the whole discussion about using tariffs to achieve certain objectives such as punishing other countries. And the Biden administration has just continued that.

So the whole environment has really changed from 20 years ago when trade policy was pretty quiet business, and now we're talking about industrial policy, tariffs, subsidies, and all these different interventions because the whole global and geopolitical environment has changed quite dramatically. - [Speaker] And it would change even more dramatically with Trump's proposed tariff plan. In the short run, we know the economy will suffer.

In the long run, no one really knows. Will it be a war between the US and the rest of the world or the western world against China? Trump wants to play a game of chicken to find out.