Donald Trump, as he repeatedly promised throughout his presidential campaign, has announced tariffs of upward of at least 10 per cent on all imports into the US.
Imports from Australia will attract the equal lowest tariff of any country, 10 per cent, less than half the tariff that will apply to imports from Japan, India and the EU. Chinese goods will be taxed at more than 50 per cent. Australian beef exports will apparently even escape US tariffs entirely.
Australia has done very well out of this relative shift in revenue-raising in the US from taxation on labour income to taxation of imports. Most economists argue this huge new round of tariffs will be passed on into higher domestic prices for Americans in any case, so why is that any of our business?
America is facing $US2 trillion ($3.19 trillion) deficits as far as the eye can see; it must either cut spending or lift taxes. Trump’s unilateral tariffs announced on Thursday will make significant inroads into that colossal gap, raising around $US700bn a year, according to The Wall Street Journal.
Amid the cacophony of ignorant rage over the US tariffs, another obvious though no less significant point has been overlooked: Trump repeatedly said he would prefer to rely more on tariffs and less on income tax.
“From 1789 to 1913, we were a tariff-backed nation and the US was proportionately the wealthiest it has ever been … then in 1913, for reasons unknown to mankind, they established the income tax,” the US President said, making an implicit argument about the relative merits of different taxes. Perhaps one that’s gone over our Prime Minister’s head!
It’s entirely the sovereign right of the US to decide how it raises revenue from economic activity that occurs within its jurisdiction. If the US, whose share of global GDP has halved to around 25 per cent of global GDP since World War II, wants to build an economic moat around itself, then so be it.
Australia prevents foreigners from buying established dwellings and accessing our subsidised public health and, quite reasonably, insists foreign workers pay Australian rates of income tax. Similarly, Australians pay US tax rates when conducting business in the US.
Trump often says tariff is “the most beautiful word in the dictionary”. But it is a wonder it’s in the dictionary at all, given the confusion caused. Tariffs are simply another type of tax, in this case on US importers, which are the only entities obliged to pay any of these new taxes to the US government. No Australian will pay a cent to the US government from these tariffs.
It’s not correct to say the US is putting tariffs on Australia or other countries; no one outside the US will pay a cent to the US Treasury as result of these new measures. To be sure, Australian and other exporters into the US may choose to lower the prices they charge US importers to partly offset the impact of the tariff, thereby seeking to remain competitive against locally produced alternatives.
But that’s nothing new. The real burden of a given tax is never the same as the legal incidence. It depends on the relative market power of buyers and sellers in a given market.
All taxes – whatever names they go under: customs, duties, levies – are bad in varying degrees, and there’s a strong argument that income tax (Australia’s favourite) is even more economically damaging than a general tariff, let alone the stamp duties Australia levies on property transactions at obscene levels.
Far be it for us to lecture the US on optimal taxation!
“Tariffs are a recipe for higher prices and slower growth right around the world,” said Treasurer Jim Chalmers, whose government has imposed industrial and energy policies that do just that.
Trump hopes tariffs will revive the emaciated US manufacturing sector, which began to shrink precipitously in the early 2000s as American firms moved operations offshore to lower cost jurisdictions. Trump is channelling an increasingly niche but longstanding view about the pre-eminence of manufacturing going back to Alexander Hamilton, who once wrote: “Not only the wealth, but the independence and security of a country, appear to be materially connected with the prosperity of manufactures.”
Such jobs will only return if businesses believe these new measures to be permanent, and if the tariff makes significant enough inroads into the cost advantage of manufacturing outside the US. But that’s far from clear, given US wages are among the highest in the world.
In any case, the long-term damage to the global economy may not be as severe as feared.
Tariffs got a very bad name in the wake of Herbert Hoover’s infamous Smoot Hawley Act of 1930, which is widely believed to have triggered the Great Depression. No doubt, a significant increase in tariffs didn’t help the US economy at that time, but the New York stock market and industrial production had already tanked a year earlier owing to a more fundamental economic malaise.
Almost a hundred years later, the benchmark S & P500 index in New York fell by less than 3 per cent on futures markets after Trump’s announcement. The local ASX200 fall didn’t even breach 2 per cent, suggesting the long-term hit to growth from these measures isn’t so significant. The economics profession appears to be predicting serious economic disruption, but that same group has made a habit of being totally wrong about the economic outlook for years – think the global financial crisis and Covid burst of inflation.
The word tariff incites fear and loathing, but it is just another tax, one of many the US might need to increase if Washington refused to get spending under control.
Adam Creighton is chief economist at the Institute of Public Affairs.
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