Trump's imposed tariffs across various sectors could spark a massive trade conflict.
Donald Trump is handing out tax reductions like sweets. Simultaneously, he's hinting at widespread import taxes to safeguard his own industry. The aftermath isn't entirely predictable. Economists are visibly alarmed.
According to Trump, tariffs are the most critical component for a thriving U.S. economy. "Tariff is the most pleasant term in the dictionary for me," Trump declared during his political campaign, "it's my preferred term." Companies looking to avoid import taxes but continue business in the U.S. must manufacture their products domestically, Trump suggested to business representatives. Trump pledged to impose the most significant tariffs in history, which he claims will generate industrial jobs and billions of dollars in state revenue.
Politicians often make sweeping promises during election campaigns. However, Trump's are notably radical. Instead of tax cuts for his supporters, he proposes highly protective tariffs on imported goods. Trump has visited various states in the U.S. recently, promoting plans that would backwardly push the country back to the 19th century. Since 1913, the U.S. has relied on income taxes, with import tariffs serving as the primary source of revenue beforehand.
Currently, the U.S. government continues to enforce the import tariffs Trump imposed on China a few years ago and has even demanded 100 percent tax on electric vehicles from the country. Trump suggested imposing a 60 percent tax on all imports from China and a 20 percent tax on all products from other nations. Trump also threatened 200 percent retaliatory taxes for companies shifting their production to Mexico and a 100 percent tax on everything originating from there. This would essentially make the USMCA free trade agreement between Mexico and Canada, which Trump negotiated, obsolete.
"It would harm everyone"
Tax cuts are meant to improve domestic worker's lives and transform the U.S. into a "global industrial powerhouse" again, according to Trump. Exemptions on overtime pay? No more taxable. Social benefits? No taxes either! Trump also announced tax cuts for companies that produce domestically. These changes could result in additional trillions in national debt, horrifying economists who forecast the consequences. Already in June, 16 Nobel laureates in economics had issued a warning in an open letter about Trump's plans and their "destabilizing effect."
"It would be a severe hit to the economy, a wild ride," said economist Maurice Obstfeld from the University of California. Consumers would soon feel the consequences, through steadily increasing inflation due to rising prices. Additionally, the risk of a recession would also escalate. While additional industrial jobs could be created, the negative effects would outweigh the positive ones. "It would harm everyone," said Obstfeld.
Countries may, as in the past, impose counter-tariffs on U.S. products. A worldwide trade war could erupt on various fronts. "This is not just about economics, but global politics," said economist Jason Furman from Harvard University. It's illogical to impose tariffs on allies that are meant to be part of a coalition against China. "The largest trading partner for most of the world is China, and if they had to choose, they would choose China, not the United States."
A Gold Rush of Tax Evaders?
Changes to the tax system could cause immense instability. Republican Senator Bill Cassidy warned of tax-free overtime: "Everything would become overtime," Cassidy cited Politico. Employers and employees could deceive the tax authorities by amending employment contracts or orders, reducing the number of regular hours to pay less income tax. The unforeseen consequences of this dynamic could potentially deprive the tax authority of hundreds of billions of dollars. If Republicans gain control of Congress in the November election, they could also prolong Trump's 2017 tax plan, which is set to expire by the end of 2025. This could lead to an additional deficit of $4.6 trillion in the public purse. The outlook for the federal budget is already dismal: in the 2024 fiscal year, Washington spent $6.29 trillion, with $1.8 trillion primarily used for new loans. Interest payments, which increased by 35 percent, accounted for half of this. This is more than the government spent on Medicare, the state health insurance for seniors.
Trump's proposals target specific voter groups. For instance, senior citizens in Florida, service workers in Las Vegas, and hourly wage earners in the Rust Belt, without whom Trump might struggle to win the election against his opponent Kamala Harris. In this way, Trump satisfies the desire of many Republicans for less government intervention: Keep our money, and we can manage on our own.
The authors of the Project 2025, a conservative manifesto for a Republican presidency, advocate for the abolition of income tax and the introduction of a nationwide consumption tax. The U.S. tax authority does not collect a nationwide consumption tax, instead, individual states impose their own sales taxes on products. Since 1913, Washington has also managed income taxes, which currently account for about 50 percent of total state revenues. Another 35 percent comes from revenues shared between employers and employees, used to fund social security, among other things.
Reputed Republican strategists agree that Trump's financial plans don't add up. This is true for some Republican legislators as well. Furthermore, a transition from income to consumption tax would affect low-income voters adversely, as they spend a larger portion of their income on goods that would increase in price due to Trump's tariffs. As reported by "The New York Times," an economist from Columbia University said, "You wouldn't start with tariffs if you wanted to implement a consumption tax." Economist Obstfeld comments, "This takes us back to the 1930s. If the USA decimates the system, there's a risk that there will be no rules remaining, and no one will feel obligated to observe ethical conduct in their global economic interactions." Implementing general tariffs would be akin to deploying a hand grenade in the system's core. If Trump utilizes tariffs as leverage in negotiations with individual nations, it would be a flagrant breach of the World Trade Organization's regulations. Companies or states seeking exceptions would need to be in Trump's favor, while others could face his wrath.
The United States, under Trump's leadership, is advocating for increased tariffs on imported goods as a means of protecting domestic industries and creating jobs. This stance contrasts with historical U.S. reliance on income taxes, with import tariffs serving as a primary source of revenue before 1913.
Following Trump's proposed tariffs, economists like Maurice Obstfeld from the University of California have expressed concerns, predicting a potential severe impact on the economy with the risk of a recession and increasing inflation due to rising prices.
