Are the Trump Tariffs Good for Small Business?

By SBE Council at 14 January, 2016, 12:20 pm

As exporters, importers and consumers the proposed tariffs – and ending NAFTA – would “impose serious costs on U.S. entrepreneurs, and undermine economic opportunity.”

By Ray Keating-

Republican presidential candidate Donald Trump is not very big on free trade – though he says that he is. In reality, Trump seems to be rather protectionist when it comes to trade policies, including his call for a 45 percent tariff on imports from China as well as ending the NAFTA between the U.S., Canada and Mexico.

Let’s sort through this, get at the problem with Trump’s emphasis on stepping back from free trade, and make clear that working against free trade is bad for the U.S. economy, including for U.S. consumers, workers and small businesses.

Trump told the New York Times editorial board that he favored a 45 percent tariff on U.S. imports from China. The Times reported the following:

“I would tax China on products coming in,” Mr. Trump said. “I would do a tariff, yes — and they do it to us.”

Mr. Trump added that he’s “a free trader,” but that “it’s got to be reasonably fair.”

“I would do a tax, and the tax, let me tell you what the tax should be … the tax should be 45 percent,” Mr. Trump said.

He subsequently left himself some wiggle room, according to an Associated Press story, on the size of any such tariff.

As for NAFTA, Trump favors breaking the treaty. As Time reported in late September:

Republican presidential candidate Donald Trump said Sunday that he would renegotiate or break the North American Free Trade Agreement (NAFTA).

“We will either renegotiate it or we will break it,” Trump said during an interview on 60 Minutes, following a question about how to keep American jobs from moving to Mexico. “Because, you know, every agreement has an end.”

NAFTA, which has been in effect since the mid-1990s, allows free trade between the United States, Canada and Mexico.

“We need fair trade. Not free trade,” he said.

These NAFTA comments, by the way, echo what presidential candidate Barak Obama said during the 2008 campaign. Trump also threatened to slap a 35 percent to 40 percent tariff on Ford Motor Company cars and auto parts brought into the country from any plants the firm has in Mexico.

In addition, Trump has said that Mexico would pay for the massive wall that he wants to build on the U.S.-Mexico border. According to a Bloomberg report, Trump said the following to Sean Hannity: “I watch politicians come on: ‘can you imagine, Sean, he’s saying Mexico’s going to pay? They’ll never pay.’ And I’m saying, that’s like a hundred percent. That’s not like 98 percent. Sean, it’s a hundred percent they’re [going to] pay. And if they don’t pay, we’ll charge ‘em a little tariff. It’ll be paid. But we need the wall.”

By the way, no word on whether or not Trump would impose tariffs on his own Donald J. Trump Signature Collection clothes line produced both in Mexico and China, or on the results of his own international investments.

But let’s get down to the key issues if the Trump Tariffs and his trade agenda were implemented.

Higher Taxes on Trade Is Destructive

In terms of total trade (that is, exports plus imports), China is our number one goods trading partner, and Mexico is number three. As for exports, Mexico is the second largest export market, and China is the third. By the way, Canada is the United States’ largest export market, and is our second largest trading partner. To put it another way, individuals and businesses conduct significant business, make large numbers of transactions, and seek opportunity across international borders between the U.S., Mexico, China and Canada. Seeking to effectively start a trade war always makes for dangerous policy. Keep in mind the last time the U.S. moved in an overtly protectionist direction. The Smoot-Hawley Tariff Act of 1930, passed by a Republican Congress and signed into law by President Herbert Hoover, played a central role in the collapse of global trade and ushering in the Great Depression. Raising taxes (a tariff is a tax on imports) on individuals and businesses working, investing and conducting business internationally would be a clear economic negative for the U.S.

U.S. Small Businesses Hurt

When talking about raising the costs of international trade via increased tariffs, it’s critical to understand that in terms of the number of businesses involved internationally, the population overwhelmingly is about small and mid-size firms. Therefore, by raising the costs of international trade, small businesses will get hit hard.

Consider that, according to the U.S. Census Bureau, in 2013: “Small- and medium-sized companies (those employing fewer than 500 workers, including number of employees unknown) comprised 97.7 percent of all identified exporters and 97.1 percent of all identified importers.” In addition: “Among companies that both exported and imported in 2013, small- and medium-sized companies accounted for 94.4 percent of such companies.”

-Zeroing in on very small firms, 37.1 percent of exporters had less than 20 employees, and among importers, 42.6 percent also had less than 20 workers.

-Consider that among U.S. firms exporting to China, 92.1 percent were small and mid-size companies with less than 500 workers, and 36 percent had fewer than 20 workers.

-As for exporting to Mexico, 93.9 percent had less than 500 employees, and 31.6 percent less than 20 workers.

-On the importing side, 96.3 percent of U.S. importers dealing with China had less than 500 workers, and 42.8 percent less than 20 workers.

-And among U.S. importers and Mexico, 86.9 percent had less than 500 employees, and 30.3 percent had less than 20 workers.

Again, small business, and their employees, will pay if trade barriers are raised.

U.S. Consumers Hit Hard

Mr. Trump seems to think that slapping big tariffs on imports would be costless for the U.S. Again, for example, he has floated the idea that tariffs on goods from Mexico would somehow pay for his massive wall on the U.S.-Mexico border. In reality, of course, consumers, entrepreneurs, and businesses – including small businesses – that buy imported consumer and capital products would face higher costs and fewer choices. Make no mistake, it is U.S. consumers and businesses that would foot this massive bill.

U.S. Workers Hurt

Playing dangerous and costly policy games when it comes to trade spells trouble for U.S. workers. It must be understood that trade-related jobs are a significant share of overall employment, and they rank as high paying.

The Office of the U.S. Trade Representative reported that in 2014, 11.7 million jobs were supported by U.S. exports. Meanwhile, the Business Roundtable found in an October 2014 study: “Today, nearly 40 million U.S. jobs depend on trade. This means that more than one in every five U.S. jobs is linked to exports and imports of goods and services. Nearly three times as many jobs were supported by trade in 2013 as in 1992 – before the accelerated wave of trade liberalization that began with the implementation of the North American Free Trade Agreement in 1994 – when our earlier research found that trade supported 14.5 million jobs, or one in every ten U.S. jobs.”

Also, the International Trade Administration has found: “Exporting has a significant positive impact on earnings. We estimate that exports contribute an additional 18% to workers’ earnings on average in the U.S. manufacturing sector.”

U.S. Economic Growth Reduced

In recent times, trade has become increasingly important to U.S. economic growth. For example, in 1960, exports accounted for 5.1% of U.S. GDP, and total trade (exports plus imports) equaled 9.5% of GDP. Compare that to 2014, when exports accounted for 13.4% of GDP, and total trade came in at 29.9% of GDP. And in terms of growth in real GDP, real export growth accounted for 23.4% of real GDP growth from 2000 to 2014, and real total trade equaled 46.1% of GDP growth.

By the way, it’s worth noting that U.S. trade with Mexico has grown dramatically since NAFTA went into effect, with goods exports from 1993 to 2014 rising by 478 percent (in nominal dollars), and total goods trade up by 556 percent. Also, U.S. exports to China increased by 664 percent, and total trade was up by 361 percent from 2000 to 2014. That’s good news.

Unfortunately, the latest trade data from the U.S. Bureau of Economic Analysis tells an unsettling story. Exports fell for the second consecutive month in November 2015, and were down by 8 percent compared to the recent high set in October 2014. The November level of exports actually was the lowest since January 2012. Meanwhile, imports also fell in November. It was the third consecutive monthly decline, and imports were down by nearly 7 percent compared to the recent high set in December 2014. But for another poor monthly showing early this year (in February), the import level in November was the lowest level registered since April 2011.

This very troubling trend for the U.S. economy would only get far worse if the Trump Tariffs were imposed. Increased costs at home due to higher tariffs would slow growth, and reduced export opportunities as other nations retaliate against U.S. protectionist measures also would hit U.S. GDP.

Conclusion

Are there problems in our trade relationship with China? Of course. For example, China does a lousy job at protecting intellectual property, and its communist government controls far too much of the economy. But raising other trade barriers is not the answer. Are there problems with trade with Mexico? Not much actually.

Trade is a positive for small business, for workers, for incomes and for overall economic growth. As both basic economics and history make clear, the Trump Tariffs would impose serious costs on U.S. entrepreneurs, businesses and workers, and undermine economic opportunity.

Raymond J. Keating is Chief Economist, Small Business & Entrepreneurship Council.