Tariffs: A bad idea, poorly implemented (The Contrarian)

Excerpt

In fact, the existence of U.S. trade deficits stems automatically from the fact that the United States is a good place to invest and thus attracts more capital investment from foreigners than it invests abroad. A country that imports capital will have to run trade deficits. This means that tariffs will not—indeed, cannot—eliminate trade deficits. Ironically, Trump’s own 2017 tax cut legislation made the United States a better place to invest, which, other things equal, raises trade deficits further.

Second, the claim that other countries will pay the tariffs is contradicted by the evidence. Tariffs are borne by American consumers and businesses and, in particular, by lower-income households, who tend to consume more imported goods as a share of their budget.

Third, the claim that other countries subsidize their exports and therefore we have to retaliate is incorrect. These countries apply value-added taxes (VATs). VATs are domestic consumption taxes, just like retail sales taxes. No one would charge retail sales tax on exports, and no one would consider not charging retail sales tax on exports to be an export subsidy. The same logic applies to a VAT. The VAT, however, is collected in chunks at each stage of production rather than in one fell swoop at the final sale. This means that, under a VAT, before a good is exported, some tax has already been collected on input sales earlier in the production process. So, it makes sense to rebate all tax on value added before export. This is not an export subsidy—it is just what is needed to ensure that a VAT only taxes domestic consumption.

This also shows why the claim that VATs discriminate against the United States—often summarized as “they tax our imports but we don’t tax theirs”—is invalid. If a German or U.S. automaker sells in the German market, they pay the German VAT. If they sell in Japan, they pay Japan’s VAT. If they sell in the United States, neither pays any VAT because the United States does not have a VAT. The German and U.S. automakers are treated equally in each case.

https://open.substack.com/pub/contrarian/p/tariffs-a-bad-idea-poorly-implemented