🌐↔ A Quick Q&A on trade protectionism with ... economist Kimberly Clausing

Also: A few thoughts on Tesla and self-driving cars

Donald Trump’s first-term efforts to Make America Great Again included a series of increasingly heavy tariffs on various imported goods, from aluminum to solar panels. His penalties on Chinese imports amounted to an all-out trade war.

Trump says a second term would mean 10 percent across-the-board tariffs on all US imports, plus 50 percent for Chinese imports. The goal: to bring home American jobs, reinvigorate American manufacturing, and even use tariffs as a substitute for income tax. I asked Kimberly Clausing a few quick questions on what Trump’s plan would mean for the US economy and foreign relations. Among her recent writings: “Can Trump replace income taxes with tariffs?”

Clausing holds the Eric M. Zolt Chair in Tax Law and Policy at the UCLA School of Law. She formerly served as the lead economist in the Office of Tax Policy under the Biden Administration. Additionally, she is a nonresident senior fellow at the Peterson Institute for International Economics, a member of the Council on Foreign Relations, and a research associate at the National Bureau of Economic Research. Her work focuses on the interactions between government and corporate behavior amid the global economy.

1/ Why are both the right and the left seeing a rise in protectionist leanings?

In my 2019 book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital, I argue that economic discontent can arise from many factors, including slow wage growth, periods of increasing inequality, and places of concentrated job loss. While the evidence indicates that many, many factors contribute to these adverse economic trends (such as technological change, rising market power, declining unionization, changes in social norms, and changes in tax and regulatory policies), international trade has also played a role.

That said, restricting trade (or immigration) would cause more harm than good in responding to these concerns. Unfortunately, politicians too often use foreigners and immigrants as scapegoats, since blaming outsiders is easier than doing the hard work required to strengthen US fundamentals. In the book, I suggest that we instead do the hard work, rather than peddling protectionism, since the latter will harm the very groups it is supposedly helping. (And so far, our recent experience with higher tariffs has shown that to be the case!)

2/ What would be the consequences of an attempt to shift toward tariffs as an alternative to income tax for federal revenue?

Candidate Trump has suggested a 10 percent across-the-board tariff on all US imports, as well as an additional 50 percent tariff on Chinese goods. At times, he has suggested even higher tariffs, or to simply replace the income tax with tariffs. These ideas are, simply put, very bad, for reasons I describe in great detail (alongside Maurice Obstfeld) in a recent blog post.

As fiscal policy, the revenue potential of tariffs is limited; there is no way that tariffs could supplant the income tax. The tariff tax base (about $3 trillion in goods imports) is much smaller than the income tax base (more than $20 trillion in income). Tariff rates would have to be very high to raise even a decent fraction of what the income tax raises, and as tariff rates rose, the tax base would shrink, as consumers would buy fewer imports due to their higher prices. Even if the tariff policy were pushed to its maximum, it could only replace part of the income tax. Such a policy would come at a very high cost in terms of harms to economic efficiency, after-tax income inequality, macroeconomic stability, and international relations.

Tariffs are also distortionary, since they shift economic resources away from activities where the United States has a comparative advantage and toward goods that we are less suited to making.