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Ideas

Our home for bold arguments and big thinkers.

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Reuters/Carlos Barria
Ready for a trade war.
THE (LESS GREAT) WALL

Donald Trump has a delusional plan to tax Chinese imports and fix American trade

Roger Alford
By Roger Alford

Associate dean, Notre Dame Law School

Unfortunately, Republican primary voters have made the remarkable choice to take Donald Trump seriously, and we now have little choice but to contemplate the ramifications of a Trump presidency for United States foreign policy.

In terms of US trade, Donald Trump would be an unmitigated disaster. Trump, of course, has a penchant for incendiary comments, and his statements regarding international trade are as ludicrous and uninformed as many of his other foreign policy positions. Almost everything Trump says about Chinese trade is wrong. “We don’t win anymore,” “They are taking our jobs,” and “They don’t play fair.” These are all platitudes without substance, but a significant percentage of Americans are buying his snake oil. The answer to our Chinese problem, according to Trump, is a trade war. “The only power that we have with China is massive trade,” Trump says, so we should tax China. “I would tax China on products coming in. Let me tell you what the tax should be,” he told the The New York Times earlier this year (and later tried to deny.) “The tax should be 45%.”

“I would tax China on products coming in. Let me tell you what the tax should be… the tax should be 45%.”

The solution to our trade problems with China, he thinks, is to build a tariff wall. Build a wall and make them pay.

Trump thinks that Mexico will pay for the Mexican wall, and he thinks that China will pay for a Chinese tariff wall. But he is wrong. The American people would pay for the wall with higher consumer prices and reduced American exports.

First, how would such a tariff increase impact American consumers? A 45% tariff on Chinese products would be an indirect tax on American consumers. On average, the United States imposes a 3.5% tariff on foreign products. Over 20% of all United States imports come from China, with a total value of over $500 billion. At 3.5%, the tariff on $500 billion worth of Chinese imports is $17.5 billion. At 45%, the tariff would be $225 billion. That’s an increase of over 1,186%. In other words, assuming Chinese imports continued at their current rate, Donald Trump’s proposed tariff wall with China would reflect an indirect tax on American consumers of over $200 billion. A tax increase of over $200 billion would be one of the largest in American history, greater than the combined tax increases imposed by US presidents Obama, Clinton, and Carter.

Trump thinks that Mexico will pay for the Mexican wall, and he thinks that China will pay for a Chinese tariff wall.

To be more concrete, as detailed here, the United States imports from China over $135 billion worth of electronic equipment, over $100 billion worth of machinery, over $30 billion worth of furniture, over $25 billion worth of toys, and over $18 billion worth of footwear. All of us routinely purchase Chinese products, and we each would face a dramatic price increase as the 45% tariff is passed on to consumers.

Second, how would the tariff increase impact American exporters? Trump’s tariff wall is undoubtedly illegal under World Trade Organization (WTO) rules. The rules were designed to make sure that countries keep their trade promises. Donald Trump’s proposal is a blatant breach of our promise to keep tariffs low. All of our tariff rates are “bound,” meaning we have committed by treaty not to increase beyond the bound rate. Every imported product has a bound tariff rate, and under GATT Article II, any tariff above that ceiling violates WTO rules.

China would undoubtedly win if it challenged the Trump tariff wall.

Trump’s proposed tariff wall would break the United States’ promise to maintain its current tariff rates. China would have the right to bring an action before the WTO to challenge the 45% tariff increase. Just as the United States would undoubtedly win if China tried to do something similar to us, China would undoubtedly win if it challenged the Trump tariff wall. The WTO would demand that the United States keep its tariff promises, and authorize China to raise tariffs on United States’ products coming into China equal to the harm the United States caused to China.

In other words, if China suffers over $200 billion worth of harm from increased tariffs on Chinese products, the WTO would authorize China to increase tariffs on US products by the same amount. Over 7% of all United States exports go to China, with total US exports to China exceeding $120 billion.

So if China is hit with over $200 billion of tariff increases, China would be authorized to impose over $200 billion of tariff increases on the $120 billion of American exports. Our major exports to China include soybeans ($15 billion), civilian aircraft ($8.4 billion), passenger vehicles ($5.2 billion), copper ($3 billion), corn ($1.3 billion), and coal ($1.2 billion). American workers with jobs in these industries would be severely injured by these WTO-authorized Chinese countermeasures. All those American auto workers, corn and soybean farmers, and coal miners who support Trump would see their Chinese export market shrink. A tariff increase this dramatic could effectively close the Chinese market to American exports. And it would be completely proper for China to do this to compensate for our illegal behavior.

In short, the great Chinese tariff wall that Donald Trump has proposed would severely injure American consumers, making the price of all Chinese products dramatically higher. It would also severely injure American workers, as US exports to the Chinese market would sharply contract. The economic harm that his tariff wall would have on the average American is shocking. Yet his supporters remain blissfully unaware that the United States would not win if it entered a trade war with China.