U.S. President Donald Trump loves tariffs.
He sees them as a powerful weapon to force factories to relocate to the U.S., bully countries into making trade concessions and eliminate the trade deficit. And he insists all that tariff revenue will pay down the massive U.S. government debt.
That’s mostly nonsense, of course.
Tariffs are just another form of taxation, and a particularly noxious one at that. Mr. Trump may think he’s punishing Canada or China. But tariffs are a tax on imports, and they are paid primarily by consumers and businesses in the countries that impose them. Worse, tariffs can have all sorts of unintended consequences, including discouraging the kind of trade that makes economies more productive, steering investment into inefficient industries and driving up the cost of everything. When targeted countries retaliate, any marginal benefits may disappear.
But we know all that. The economics and history of protectionism are unambiguous.
What may be less obvious is the havoc tariffs cause in markets for specific goods. New research by three economists at the University of the Chicago and the U.S. Federal Reserve explored what happened when Mr. Trump slapped tariffs last year of 20 per cent, then 50 per cent, on imported washing machines. And it’s not good.
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At first blush, the tariffs look like a winner. Whirlpool, the main U.S. maker of washing machines, added 200 jobs at a plant in Ohio. South Korea’s Samsung and LG opened new factories in South Carolina and Tennessee respectively, creating another 1,600 jobs.
Here’s where it gets interesting. Appliance makers permanently raised prices on all washers by an average of 12 per cent, including ones made in the U.S. and not subject to the tariff, according to the study.
The price of clothes dryers also went up by 12 per cent, or nearly US$100 apiece. The researchers concluded that manufacturers exploited the new inflationary environment, simply because they could. Knowing consumers generally buy washers and dryers in pairs, appliance makers raised prices on both items.
Consumers are losing big time. Americans are collectively paying US$1.5-billion more per year for washers and dryers that are no better than the cheaper ones they were buying before the tariffs.
Mr. Trump can claim a partial victory due to the creation of 1,800 jobs. But at an average cost of US$820,000 per job, it’s a steep price to pay, compared with other job-creation programs, the study concluded.
Meanwhile, the tariffs generate a meagre US$82-million per year for the U.S. Treasury. That’s a blip relative to the U.S. government debt of US$22.2-trillion.
And the U.S. trade deficit has continued to rise (by another US$81-billion in 2018 alone). Tariffs have the perverse effect of suppressing both imports and exports because the U.S. dollar tends to gain strength versus other currencies when the country closes its borders. A higher dollar makes U.S. exports more expensive, and therefore less desirable in the rest of the world.
The big winners of the washing machine tariffs are appliance makers, both the foreign ones and Whirlpool. The companies are passing on the cost of the tariffs on imported products to consumers, and then some, generating a nice profit, the researchers found. They’re even taking advantage of the tariff effect to raise prices on U.S.-made washers and dryers.
This story is not just about washing machines. Thanks to Mr. Trump’s tariff spree last year, 15 per cent of all U.S. imports are now covered by some kind of tariff or quota. Washing machines represent just 0.1 per cent of that protective umbrella, according to the Washington-based Peterson Institute for International Economics.
Mr. Trump’s tariff war has been more damaging and far-reaching than people realize. As the Bank of Canada warned last week, the global economy is now in the midst of a “synchronous” slowdown, due in part to rising trade fights over such items as cars, steel, motorcycles and, yes, washing machines.
The pace of global growth slowed in 2018 to 3.6 per cent, and will decelerate further to 3.3 per cent this year, according to the latest forecast from the International Monetary Fund. Countries representing 70 per cent of the global economy are gearing down, including Canada and the U.S.
The spin cycle is already on slow.
By next year, it could stop rotating altogether.