Trump’s team considers a 5 percent tariff on imports: How serious?

President-elect Donald Trump’s transition team is floating an executive order that would levy a blanket 5 percent tariff on imports as part of his trade reform plan, a move that some say could hinder rather than boost economic growth.

Trade reform became a cornerstone of Mr. Trump’s campaign, propelling him to victory in rust belt states that have suffered as domestic manufacturing jobs dwindled. The businessman has vowed to tear apart the North American Free Trade Agreement, and he became a vocal critic of China's economic policies on the campaign trail by promoting a tough-on-trade platform bent on bringing jobs back to American workers.

According to a CNN report, Trump’s chief of staff Reince Priebus told Washington business insiders that the incoming administration has debated the merits of a 5 percent tax on imports. Those in the business realm have met the proposal with fierce opposition, saying they hoped that it would serve only as a negotiation tactic and never come to fruition as an executive order.

Such an initiative would likely boost only a few industries in the United States, and has basically no precedent in modern American politics, says Edward Alden, a senior fellow at the nonpartisan Council on Foreign Relations.

“There would be a lot of losers,” he tells The Christian Science Monitor in a phone interview Thursday. “If he goes ahead, there would be a lot of screaming – from retailers across the board, from consumers and consumer organizations, from most parts of the manufacturing industry. And obviously other countries are going to complain vociferously.”

Others with vested business interests agree, and have reportedly warned Mr. Priebus that an across-the-board tariff could start trade wars, anger US allies, and make it difficult for the president-elect to deliver on the economic growth promises made on the campaign trail. 

"This $100 billion tax on American consumers and industry would impose heavy costs on the US economy, particularly for the manufacturing sector and American workers, with highly negative political repercussions," an anonymous business community said in prepared talking points, CNN reported. "Rather than using a trade policy sledgehammer that would inflict serious collateral damage, the Trump administration should use the scalpel of US trade remedy law to achieve its goals."

Former President Richard Nixon was the last US leader to levy a flat import tax. In 1971, he imposed a 10 percent tariff, hoping to combat trade deficits by cracking down on currency manipulators. It was a negotiating tool, giving the US leverage to address exchange rate discrepancies. It worked, and President Nixon removed the tariff.

But Trump is poised to inherit a very different nation than Nixon’s. The US economy is far more integrated into the global trade fabric, with intricate global supply chain manufacturing systems. While some American manufacturing industries, such as steel or automobiles, could benefits from the tax, it would likely have an overall detriment on US economic growth, raising prices for consumers on the many imported goods integral to daily life.

As Business Insider reports, the plan isn’t likely to make US manufacturers more competitive, and high labor costs among American workers could still make manufacturing oversees more appealing. Ultimately, experts say, the tariff could result in a 0.5 percent reduction in GDP growth in just one year.

A crucial thing to consider here is that this type of price increase is not caused by the virtuous wage and price increase cycle, but rather an exogenous shock to prices without a boost to the labor market. In plain English, that means that while parts manufactured in China instantly becomes more expensive for Americans under tariffs, wages do not necessarily go up the corresponding amount to offset this cost increase.

Theoretically, companies could avoid tariffs by producing more in the US. The problem here is, however, that labor is more expensive in America, so even if companies bring production to the US, the increased labor costs could push up prices, too.

The many complications involved, not to mention the vocal opposition to such a plan, have led some to believe any import tax hike would serve as a negotiating tactic rather than concrete policy.

“My presumption has been that the Trump team would try to use the threat of tariffs to extract certain concessions from trading partners,” Mr. Alden, who wrote the 2016 book, "Failure to Adjust: How Americans Got Left Behind in the Global Economy," says. “This may well be a trial balloon to get other countries thinking, ‘Oh, they’re going to do crazy things. We better try to negotiate with them.’ ”

Trump has threatened to impose a 45 percent tariff on Chinese imports and declare the nation a currency manipulator on his first day in office. Earlier this month, he used the term “war” to refer to his trade policies.

"And we have to look at it almost as a war, because that's what's happened to us," he said, speaking at a victory rally in Fayetteville, NC. "That's what's happened to our workers."

While some have set off sirens surrounding the 5 percent tariff, warning that it could start a trade war, those concerns are likely premature. Such a high import tax would likely trigger a challenge from the World Trade Organization, which has developed mechanisms to handle such conflicts. The US would become entangled in a trade war only if those mechanisms failed. At that point, say experts, other nations could levy equally imposing tariffs on American exports.

The theoretical import tariff is likely to receive bipartisan criticism, but Alden says he’s optimistic other measures the team has put forward, such as corporate tax reform, decreasing regulations, and investing in infrastructure, could benefit the US economy and work to reduce our trade deficit overtime.

“I would like to see the US trade deficit reduced, but I would like to see it reduced because the United States is producing more,“ he says. “An across-the-board 5 percent tariff is just shooting ourselves in the foot.”