Trump’s tariffs will likely lead to stagnation, not a depression

President Trump’s “Liberation Day” tariffs sent shockwaves through international markets. His across-the-board duty hikes will harm American households and businesses — if they go into effect. And even with the subsequent 90-day pause, the uncertainty makes markets skittish.

Tariffs are taxes, and taxes impede specialization and trade. The U.S. will be poorer as a result of them. Perhaps other nations will negotiate, but they may instead decide to retaliate. That would make the resulting economic pain worse.

Americans sent Trump back to the White House to lower prices and grow the economy. Widespread protectionism will do the opposite. For an administration that touts its working-class bona fides, officials seem totally unaware of how burdensome tariffs will be for low- and middle-income workers. The smaller your budget, the more higher prices hurt.

That said, we shouldn’t go overboard. Forecasters and policy analysts are saying that the sky is falling. But if we overestimate the costs of trade restrictions today, we make it harder to sell the public on free trade tomorrow. There’s a reason politicians try to set a low bar for themselves before a debate or similar contest — all they have to do to win is clear it. If free traders predict calamity and instead we get mere stagnation, we become less credible.

Needless exaggerations already abound. For example, comparisons to the infamous Smoot-Hawley Tariffs and the Great Depression are everywhere. Those duties, enacted in 1930, are widely believed to have been one of the Depression’s major causes. This is one of those things that everyone knows that just ain’t so.

The Smoot-Hawley duty hikes were significant, about 20 percent (from 40 to 60 percent) on affected goods. The average increase across all imports was 6 percent (from 14 to 20 percent). However, they applied to a very small share of the economy: Imports were only 4 percent of U.S. GDP in 1930.

GDP fell by 30 percent from 1929 to 1933, and unemployment rose from 3 percent to a staggering 25 percent. Can we really explain this with a price increase on goods accounting for only 4 percent of the U.S. economy? Of course not.

Smoot-Hawley was bad policy because restricting the international division of labor makes us and our trading partners poorer. Doubtless, the tariffs made a bad situation worse, but they were not a leading contributor to the Great Depression.

We need a similar reality check on magnitudes today. It is true that trade is more important for the American economy now than it was a century ago. Imports are 15 percent of GDP. And while we don’t yet know what the final tariff schedule will be, a quick estimate suggests that Trump’s new tariffs will increase duties by 25 to 30 percent among our major trading partners. (The exception, of course, is China, where the declared tariff exceeds 100 percent.) This is certainly worse than Smoot-Hawley, but it’s still not enough to cause another depression.

Building on estimates from various sources — such as the Congressional Budget Office, the Federal Reserve and the Peterson Institute — Trump’s taxes on trade will probably lower GDP and raise unemployment by 1 or 2 percentage points. Expect the higher end of that range if our trading partners don’t negotiate, or if China imposes escalating penalties. Even so, those numbers don’t come close to the tragedy and suffering experienced by Americans in the 1930s.

Defenders of the free movement of goods and services across the globe are shooting themselves in the foot when they inflate the damage Trump’s plans will cause. We don’t need to exaggerate; the figures in themselves are bad enough to get the public’s attention.

Keep in mind that even a 1 percent decrease in GDP means the national economy will produce $300 billion less each year as long as the tariffs remain in effect. And a 1 percent increase in unemployment means 1.7 million more people will lose their jobs and struggle to make ends meet. There’s no good reason to put Americans through this hardship.

Yet it is also foolish to be cavalier with our predictions. Reckless overstatements catch people’s attention in the short run, but come back to bite us in the long run. All we’re doing is making it easier for the enemies of global commerce to cover their tracks. What the public needs now is sober warnings and level-headed analysis.

Trump’s tariffs portend economic stagnation, not depression. That is reason enough to oppose them.

Alexander William Salter is an economics professor in the business school at Texas Tech University and a researcher at TTU’s Free Market Institute. He holds fellowships with the Independent Institute in Oakland, Calif. and the American Institute for Economic Research in Great Barrington, Mass.