NEW HAVEN – US President-elect Donald Trump’s promise to impose a 60% tariff on imports from China, and a 10-20% tariff on all other imports has triggered a public debate about whether such policies are really so bad. After all, a tariff is a consumption tax, and most economists favor taxes on consumption over income taxes, since the former are more efficient and easier to administer.
But tariffs have significant drawbacks. Since they tax only imported products, they distort markets by shifting resources from more efficient foreign producers to less efficient domestic firms. This inefficiency comes at the expense of consumers, and like most consumption taxes, tariffs are regressive, placing a heavier burden on low-income households that spend a larger share of their income on consumer goods.
Still, tariffs do have political appeal. Critics of globalization in advanced economies have long argued that the efficiency gains from recent decades of trade liberalization have been modest, relative to the disruptions caused. While US consumers benefited from lower prices on imported goods, particularly from China, these widely dispersed gains were less salient than the concentrated pain of factory closures and job losses in regions exposed to import competition.
Against this backdrop, higher tariffs might not look so bad. Perhaps reversing globalization’s modest efficiency gains could redirect income toward domestic producers and workers. Perhaps tariffs’ regressive effects can be addressed with policies like exemptions for de minimis imports (valued under $800). Besides, while prices of taxed imports would increase, American consumers in the past did not seem especially appreciative of trade’s role in making the goods they consumed more affordable.
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