The Much Misunderstood Tariffs And Trade War

Weekly WastebasketThe Much Misunderstood Tariffs And Trade WarPaid by Americans, tariffs hurt the economy.

Agriculture, Budget & Tax,  | Weekly Wastebasket
Oct 11, 2019  | 6 min read | Print Article

The rapidly evolving impeachment saga risks overshadowing important developments in other issues, including the president’s various trade wars. The Chinese government trade delegation is in Washington this week for the 13th round of negotiations. Stakes are high, as another set of tit-for-tat tariff increases between the U.S. and China are scheduled for October 15. But for anyone watching, President Trump’s recent celebration of the World Trade Organization’s ruling in favor of the United States over the European Union’s subsidies to Airbus should be concerning. The president’s characterization of the ruling reflects a misunderstanding of how the WTO, tariffs, and trade work. It’s this misunderstanding that throws cold water on hopes for a resolution to the president’s fiscally reckless trade wars any time soon.

This has been spelled out before, but it bears repeating. Tariffs are taxes paid by individuals or companies when they import a product from a foreign country. U.S. imposed tariffs aren’t a line item in a bill the State Department delivers to another country. They aren’t paid by governments at all. They are taxes the federal government charges when a product is “entered for consumption, or withdrawn from a warehouse for consumption” in the United States.

Understanding how tariffs are paid, and not, is important. There is a 15-year long dispute between the U.S. and EU over the propriety of various subsidies for the world’s two largest commercial aerospace companies, Europe’s Airbus and America’s Boeing. On October 2, the WTO ruled in favor of the U.S. (a related case brought by the EU against subsidies for Boeing won’t be adjudicated until next spring –at which point the EU will impose tariffs on the U.S.– it’s complicated). President Trump tweeted in response, “The U.S. won a $7.5 Billion award from the World Trade Organization against the European Union…”

No. There is no award.

The WTO is not direct depositing $7.5 billion into the Treasury. It has instead given the U.S. the green light to raise tariffs, of up to 100 percent of the product’s value, on $7.5 billion worth of European goods imported into the United States. The administration released a list of products ranging from Airbus airplanes to Italian cheeses, French wines, and both Irish AND Scotch single malt whiskies, that will be slapped with additional tariffs of 10 and 25 percent starting October 18.

RELATED ARTICLE
The Separation of Powers Matters

The administration’s embrace of yet more tariffs is concerning because the multi-front trade war is starting to have real costs. A majority of economists agree manufacturing has already entered a recession. U.S. agricultural exports to China declined 53 percent in 2018 and are projected to stagnate in 2019. The administration has responded to the pains of farmers by deficit-financing $28 billion in income subsidies. And everyone from the Federal Reserve to the International Monetary Fund is citing the unpredictability and instability of the trade wars as the greatest impediment to growth for the world economy.

Yet the constant churn of tariffs and retaliatory tariffs has yet to produce dividends. The slight tweak of NAFTA, now called USMCA, faces an uncertain fate in Congress. The recently signed trade deal with Japan is a scaled down version of the now defunct Trans Pacific Partnership, just two years late, devoid of details on such, um, easy issues like auto tariffs, and without the 369 million consumers in the other 10 countries. Steel and aluminum tariffs, which kicked off the trade wars, are actually contributing to the decline of U.S. steel companies. And agricultural prices and incomes continue to disappoint.

Now it appears there is no end in sight. For all the seeming optimism, at least on Wall Street, that the US and China may reach an “interim” deal for China to buy more U.S. agricultural products in exchange for no additional tariffs, we’ve been down this road before. Just this spring the administration touted progress in reaching an ultimate deal with China, only to walk away at the last moment and then increase the size and scope of tariffs.

Americans – starting with taxpayers, on whose dime all the dollars move – have felt the pain regarding past tariffs and will in the future. Because throughout the tariff wars with the EU, Mexico, China, and others, it has become clear that tariffs are a tool of first choice for the Trump Administration rather than a last resort – regardless of the negative effects on the economy. We’re all in the president’s twilight zone of tariffs, and with no end in sight.