Weighing the merits of broad-based tariffs, Mark Zandi says there is only one hand

President Harry Truman once exclaimed in frustration that he wanted to speak with a one-handed economist. He was annoyed that economists endlessly deliberate the pros and cons (the two hands) of economic policies and fail to give a clear policy recommendation (the one hand).

Truman would thus be satisfied to know that when it comes to broad-based tariffs, there is no debate: economists universally think they are a bad idea. Tariffs result in higher inflation and interest rates, slower economic growth, and fewer jobs.

It is thus jarring that former President Donald Trump’s headline economic proposal is to significantly increase tariffs. On the campaign trail he talks of a 10% or 20% tariff on all imports and 60% on imports from China. To put this into perspective, the effective tariff rate is currently close to 3%, and there were essentially no tariffs in the decade prior to Trump’s first presidential term.

President Joe Biden and Vice President Kamala Harris’ administration never ended the tariffs on mostly Chinese goods they inherited from Trump. But given the vexed relationship between the U.S. and China, as China doesn’t play fair when it comes to trade, intellectual property rights, cybersecurity, and cross-border investments, dropping the tariffs would send just the wrong message.

There is also a good case for surgically applying tariffs to address China’s cheating. The Biden administration recently imposed tariffs on electric vehicles, solar panels, batteries, and several other goods coming from China.

When it comes to broad-based tariffs, however, economists don’t like them for a long list of reasons. At the top of the list is that they are a tax on all Americans in the form of higher prices for imported goods. This includes everything from basic necessities such as food and clothes, to large-ticket items like cars and cell phones. Lower- and middle-income households suffer more financially, since imports account for a larger share of their budgets.

It is simply not the case that the tariffs will be paid for by other countries or retailers. This tax will be passed through in a higher price that you and I pay as consumers. And if we need to spend more on these items, we have less to spend on other things. A wide range of U.S. businesses get hurt.

It also stands to reason that countries whose businesses face higher U.S. tariffs aren’t going to take this lying down. Countries such as China and Mexico are likely to retaliate tit-for-tat. They will impose in-kind tariffs on U.S.-produced goods exported to their countries. Others like Canada and Japan may be more circumspect in how they respond, but it is hard to imagine they won’t respond.

This will cost American jobs. Indeed, that’s what happened during the tariff war when Trump was in office. Farmers got hit especially hard as their exports to China fell sharply. Indeed, to help soothe the financial pain, Trump cut checks to the farmers. Manufacturers who sell much of what they produce overseas also got nailed, and production and jobs flagged.

Tariffs are also pernicious because they create uncertainty and confusion among businesses engaged in global trade. In the trade war during Trump’s first term, companies could petition to exempt their products from tariffs on national security grounds or if the tariff would do serious harm to the business.

It isn’t difficult to see how this becomes messy quickly. Which products are exempted? From which country? Over what period of time? Given all these and other thorny questions, confused businesses delay making decisions about their supply chains and other investments. This adds to costs and fuels even more inflation.

No doubt some of what former President Trump is espousing on tariffs is politicking and political signaling. He also may already be negotiating with trading partners and U.S. businesses that are expanding their operations overseas. Other countries may relent on existing trade disputes with the U.S. if they fear higher U.S. tariffs. The USMCA deal reached with Canada and Mexico in Trump’s first term is coming up for a refresh, and the threat of tariffs may make those countries more compliant.

However, there is also no doubt that first up on Trump’s economic agenda, if he is reelected as president, would be to impose much higher broad-based tariffs — especially since he doesn’t need Congress to act. Much of what he wants to do on tariffs he could accomplish through executive order. His actions could be challenged in the courts, but that would take time to adjudicate, and by the time the legal system weighs in, the economic damage would be done.

When it comes to weighing the merits of most economic policies, there is a reasonable two-handed debate. Not so with broad-based tariffs. They were discredited many decades ago. There is only one hand.