BACK in 1906, an insurgent politician called Joseph Chamberlain (once known as Radical Joe, he had switched to the Conservatives over home rule for Ireland*) lured the British government into a campaign in favour of tariffs. The result was a devastating defeat for the Conservatives. The opposition Liberal party recognised that tariffs were a tax on the goods bought by the poor, particularly on food, and warned that the policy would lead to a “smaller loaf”. They portrayed tariffs as “stomach taxes”.
A hundred years ago, then, it was easy to make protectionism unpopular. Despite the prosperity brought by 70 years under a more open trading system, it now seems that opinion may have changed: tariffs are favoured by “populist” politicians.**
The trick for modern populists has been to focus on the positive benefits to American workers in terms of jobs, rather than the adverse impact on consumers. In fact, protectionism is highly unlikely to restore American manufacturing jobs, which are under threat from automation as well as globalisation, as our recent briefing showed. The neglect of the consumer angle is partly because in a world of low tariffs, people have become pretty blasé about buying goods from all over the world. “You don’t know what you’ve got until you lose it” as John Lennon sang. But even the small level of existing tariffs fall most heavily on the poor, academics reckon, reducing the after-tax income of the poorest by 1.6% and that of the richest by only 0.3%.
This means the anti-tariff campaign will have to campaign hard to show the harm tariffs do to consumers. America is a net exporter of food, so it is hard to use the images that worked so well 100 years ago. Still, it is in the nature of modern trade that developed countries sell high-added-value goods and services (like software) and import raw materials and low value added goods from developing countries (cheap clothing, for example). A study in May by the National Foundation for American Policy found that
Presidential candidate Donald Trump’s proposed tariffs on China, Mexico and, by implication, Japan would be ineffective in shielding American workers from foreign imports, since producers from other countries would export the same products to the United States. Were such tariffs to be “effective,” then the tariffs would impose a regressive consumption tax of $11,100 over 5 years on the typical U.S. household. The impact would hit poor Americans the hardest: A tariff of 45% on imports from China and Japan and 35% on Mexican imports would cost US households in the lowest 10% of income up to 18% of their (mean) after-tax income or $4,670 over 5 years.
But what if the United States imposed a worldwide tariff, rather than singling out specific countries? The effects would be even worse.
When we calculate the burden as a percentage of household income, we find that households in the lower income deciles would surrender a higher portion of their income under a Trump tariff than higher income households. A Trump tariff against all countries costs households in the lowest decile 53% of their annual income, while it would cost households in the highest decile 7% of their incomes. The tariffs would cost households in the second income decile 20% of their annual income—a figure that declines as we move up the income deciles. In other words, a Trump tariff against all countries (or even one against only China, Mexico and Japan) would be a regressive tax that burdens lower income households more than higher income households.
Combine this with a set of tax cuts that will benefit the rich most and it seems clear that this aspect of populism ought not to be popular at all. Introducing tariffs may not mean a smaller loaf but it will mean that Americans lose their shirts.
* He was wrong about that too. If home rule had been granted in the late 19th century, a lot of bloodshed might have been avoided.
** Admittedly this category is ill-defined. In my view populism defines policies that may seem popular but would have negative effects, either on individual rights or (often) on the very people that support them.