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Would Donald Trump’s taxes on trade hurt US consumers?

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Reuters Donald Trump at a campaign rally pointing to the right of the picture. The BBC Verify logo is in the top righthand corner.Reuters

Donald Trump has pledged to drastically increase tariffs on foreign goods entering the US if he is elected president again.

He has promised tariffs – a form of tax – of up to 20% on goods from other countries and 60% on all imports from China. He has even talked about a 200% tax on some imported cars.

Tariffs are a central part of Trump’s economic vision – he sees them as a way of growing the US economy, protecting jobs and raising tax revenue.

He has claimed on the campaign trail that these taxes are “not going to be a cost to you, it’s a cost to another country”.

This is almost universally regarded by economists as misleading.

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How do tariffs work?

In practical terms, a tariff is a domestic tax levied on goods as they enter the country, proportional to the value of the import.

So a car imported to the US with a value of $50,000 (£38,000) subject to a 10% tariff, would face a $5,000 charge.

The charge is physically paid by the domestic company that imports the goods, not the foreign company that exports them.

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So, in that sense, it is a straightforward tax paid by domestic US firms to the US government.

Over the course of 2023, the US imported around $3,100bn of goods, equivalent to around 11% of US GDP.

And tariffs imposed on those imports brought in $80bn in that year, around 2% of total US tax revenues.

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The question of where the final “economic” burden of tariffs falls, as opposed to the upfront bill, is more complicated.

If the US importing firm passes on the cost of the tariff to the person buying the product in the US in the form of higher retail prices, it would be the US consumer that bears the economic burden.

If the US importing firm absorbs the cost of the tariff itself and doesn’t pass it on, then that firm is said to bear the economic burden in the form of lower profits than it would otherwise have enjoyed.

Alternatively, it is possible that foreign exporters might have to lower their wholesale prices by the value of the tariff in order to retain their US customers.

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In that scenario, the exporting firm would bear the economic burden of the tariff in the form of lower profits.

All three scenarios are theoretically possible.

But economic studies of the impact of the new tariffs that Trump imposed in his first term of office between 2017 and 2020 suggest most of the economic burden was ultimately borne by US consumers.

A survey by the University of Chicago in September 2024 asked a group of respected economists whether they agreed with the statement that “imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases”. Only 2% disagreed.

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Raising prices

Let’s use a concrete example.

Trump imposed a 50% tariff on imports of washing machines in 2018.

Researchers estimate the value of washing machines jumped by around 12% as a direct consequence, equivalent to $86 per unit, and that US consumers paid around $1.5bn extra a year in total for these products.

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There is no reason to believe the results of even higher import tariffs from a future Trump administration would be any different in terms of where the economic burden would fall.

The non-partisan Peterson Institute for International Economics has estimated Trump’s new proposed tariffs would lower the incomes of Americans, with the impact ranging from around 4% for the poorest fifth to around 2% for the wealthiest fifth.

A typical household in the middle of the US income distribution, the think tank estimates, would lose around $1,700 each year.

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The left-of-centre think tank Centre for American Progress, using a different methodology, has an estimate of a $2,500 to $3,900 loss for a middle-income family.

Various researchers have also warned that another major round of tariffs from the US would risk another spike in domestic inflation.

Impact on jobs

Yet Trump has used another economic justification for his tariffs: that they protect and create US domestic jobs.

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“Under my plan, American workers will no longer be worried about losing your jobs to foreign nations, instead, foreign nations will be worried about losing their jobs to America,” he said on the campaign trail.

The political context for Trump’s tariffs was longstanding concern about the loss of US manufacturing jobs to countries with lower labour costs, particularly after the signing of the North American Free Trade Agreement (Nafta) with Mexico in 1994 and the entry of China into the World Trade Organisation in 2001.

In January 1994, when Nafta came into effect, the US had just under 17 million manufacturing jobs. By 2016, this had declined to around 12 million.

Yet economists say it is misleading to attribute this decline to trade, arguing that growing levels of automation are also an important factor.

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And researchers who studied the impact of Trump’s first-term tariffs found no substantial positive effects on overall employment in US industrial sectors that were protected.

Trump imposed 25% tariffs on imported steel in 2018 to protect US producers.

By 2020, total employment in the US steel sector was 80,000, still lower than the 84,000 it had been in 2018.

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Impact on trade deficit

Trump has criticised America’s trade deficit, which is the difference between the value of all the things the country imports and the value of its exports in a given year.

“Trade deficits hurt the economy very badly,” he has said.

In 2016, just before Trump took office, the total goods and services deficit was $480bn, around 2.5% of US GDP. By 2020, it had grown to $653bn, around 3% of GDP, despite his tariffs.

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Part of the explanation, according to economists, is that Trump’s tariffs increased the international relative value of the US dollar (by automatically reducing demand for foreign currencies in international trade) and that this made the products of US exporters less competitive globally.

Another factor behind this failure to close the trade deficit is the fact that tariffs, in a globalised economy with multinational companies, can sometimes be bypassed.

For example, the Trump administration imposed 30% tariffs on Chinese imported solar panels in 2018.

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The US Commerce Department presented evidence in 2023 that Chinese solar panel manufacturers had shifted their assembly operations to countries such as Malaysia, Thailand, Cambodia and Vietnam and then sent the finished products to the US from those countries, effectively evading the tariffs.

There are some economists who support Trump’s tariff plans as a way to boost US industry, such as Jeff Ferry of the Coalition for A Prosperous America, a domestic lobby group, but they are a small minority of the profession.

Oren Cass, the director of the conservative think tank American Compass, has argued tariffs can incentivise firms to keep more of their manufacturing operations in America, which he argues has national defence and supply chain security benefits.

And the Biden/Harris administration, while sharply criticising Trump’s proposed extension of tariffs, has kept in place many of the ones he implemented after 2018.

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It has also imposed new tariffs on imports of things like electric vehicles from China, justifying them on the grounds of national security, US industrial policy and unfair domestic subsidies from Beijing.

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The rich should beware their staff biting back

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One of the many salacious details in Amazon Prime Video’s A Very Royal Scandal, a mini-series about Prince Andrew’s ill-fated interview with the journalist Emily Maitlis, is how rude the prince is to his staff. In the programme, he is routinely boorish, abrasive, abrupt and tells them to “fuck off”.

Although A Very Royal Scandal is a fact-based dramatisation, the prince’s behaviour is, according to numerous reports, well-grounded in reality. And, while Prince Andrew may be mired in scandal, there are numerous less tarnished celebrities and wealthy people whose staff are lining up to say that they’re terrible (or, occasionally, great) to work for. But are these terrible experiences typical?

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“I’ve experienced a very broad range of relationships between HNWIs and their staff,” says George Dunn, director of private staffing agency Fairfax and Kensington, referring to high-net-worth individuals “In the inner sanctum of these vast homes, I’ve known housekeepers to virtually be treated like family, especially when helping raise the children of the principal.” Staff may be working closely with their principals for decades, helping them through divorce, disputes and depression.

Dunn says that “HNWIs who are very much in the public eye typically form a closer bond with their staff due to the very solitary nature of their fame.” With the lower-profile rich, the pressure is less and the relationship may be a more normal working one.

Jonathan Alpert, a Manhattan-based psychotherapist with clients on Wall Street, says: “Things can go wrong when boundaries are blurred, expectations are unclear or when one party feels taken advantage of or disrespected.”

He says that the wealth and status imbalance can complicate the dynamic and that both parties should be aware of this. “It’s important to have clear expectations and professional boundaries to prevent misunderstandings or feelings of exploitation,” he says.

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Of course, even apparently good relationships are no guarantee against publicity. Diana, Princess of Wales was, by all accounts a good employer to her butler, Paul Burrell. Nonetheless, he seems to have made a career out of being her confidant and, even now, 27 years after her death, is still serving up revelations for the tabloid press.

Not all disagreements with staff end with straightforward dirt-dishing, though. In November 2022, Jeff Bezos, the billionaire founder of Amazon, was the subject of a lawsuit from his housekeeper, Mercedes Wedaa. The lawsuit claimed, among other allegations, a series of petty restrictions around toilet access during long shifts. Bezos’s attorney denied the allegations.

In Ashlee Vance’s 2015 biography of Elon Musk, the author wrote that when Musk’s long-serving PA, Mary Beth Brown, asked for a raise, the billionaire told her to take two weeks off. He then did her duties himself, decided they weren’t a big deal and fired her on her return. Musk has disputed the story.

It can feel like we are in an era of staff dishing the dirt on employers. There may be a number of drivers behind this. One is the growth of the new elite — the so-called second Gilded Age — who are served by people ranging from poorly paid domestic staff to upper-middle-class managers. Another factor is that the tabloid social-media ecosystem means it has never been easier to leak information — and, because of technology, these leaks are often far better substantiated, for example, with video.

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“With social media and a culture of oversharing there is a greater tendency for people to divulge secrets, whether personal or about others,” says Alpert.

What can the rich do about staff airing grievances in public? Not much. Confidentiality agreements might make disgruntled employees think twice, not least because they can affect future employability, but they won’t stop an aggrieved staff member or undo the immediate damage. “I’d advise great caution and discretion when discussing personal matters with staff and encourage creating an environment of trust but with awareness of the risks that come with modern communication platforms,” says Alpert.

The biggest bulwark against leaks remains ensuring you have a good, well-defined relationship with your staff and treat them as you’d like to be treated yourself. Of course, this won’t entirely insulate you from disgruntled ex-workers, but it will reduce the chances of leaks. Conversely, if you endlessly tell your employees to eff off, eventually some of them will — and they’ll be happy to dish the dirt on you. 

Rhymer is reading . . . 

The Empusium by Olga Tokarczuk. This is subtitled a ‘A Health Resort Horror Story’ but it’s far more than that. It’s also blackly comic, philosophical, hallucinatory, a study in misogyny, and a homage to Thomas Mann’s Magic Mountain.

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This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment

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Two key questions for this week’s investment summit

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Your front page story about infrastructure investment (“Abu Dhabi writes off Thames Water stake as Labour tries to lure investors”, Report, October 9) reports that investors have been complaining to the government that the water industry is regulated too strictly! This is a view diametrically opposed to that of the vast majority of the British public. This week’s UK international investment summit raises two questions. Who will the government listen to, and are we now on the way to other forms of infrastructure and public services being owned overseas and weakly regulated, on a basis similar to that we have seen in the water industry?

Victor Anderson
Brighton, East Sussex, UK

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Surpassing expectations: Hilton to reach 1,000 Hotels in APAC

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Surpassing expectations: Hilton to reach 1,000 Hotels in APAC

Hilton is poised to double its presence in Asia Pacific’s mid-market segment, aiming to surpass 1,000 hotels in the region.

Continue reading Surpassing expectations: Hilton to reach 1,000 Hotels in APAC at Business Traveller.

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Japan’s train-loving PM fights to keep LDP on track

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Japan has begun campaigning for a snap general election that threatens to pummel the ruling Liberal Democratic party as voters pass judgment on a slush-fund scandal, the rising cost of living and a decade-long failure to deliver greater household prosperity.

The intensive 12-day campaigning season for a vote to be held on October 27 was formally set in motion by Prime Minister Shigeru Ishiba — the quirky, 67-year-old LDP veteran who was elevated to the top job two weeks ago after a bitterly divisive party leadership race. 

Pitted against Ishiba is a fragmented line-up of five main opposition parties, with no strong inclination to join forces. The largest is the Constitutional Democratic party of Japan — itself a divided bloc led by the 67-year-old parliamentary veteran and former prime minister, Yoshihiko Noda. 

While the LDP is still likely to secure a majority, it may emerge substantially weakened and less able to tackle the economic and demographic challenges Tokyo faces.

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Japan is attempting to normalise its economy after decades of deflation and ultra-loose monetary policy, while its shrinking working population has to support an ever larger number of retirees.

Ishiba’s success may be defined by how few seats he loses at a time when the LDP is held in low esteem.

“Ishiba may be able to afford up to 20 or so losses, particularly if they are concentrated among scandal-implicated lawmakers, but more than that will impair his ability to govern,” said Tobias Harris, the founder of political risk advisory firm Japan Foresight.

Despite his image as a man of integrity, Ishiba came to power with a cabinet approval rating of 51 per cent — the lowest since that index began in 2002. In the first trading session after Ishiba emerged as Japan’s next prime minister, Tokyo stocks plunged heavily while the yen traded wildly as markets bet on whether he would press the Bank of Japan to delay interest rate increases.

That lack of market confidence hangs over Ishiba’s attempt to present himself as a revitaliser of Japan’s economy.

As Mizuho Securities strategist Masatoshi Kikuchi pointed out, while the economic backdrop of many previous elections has been poor, Japan’s long experience with falling or stagnant prices meant that the “misery index” — a calculation that adds together the unemployment rate and inflation rate — had not been much of an issue. Now, with rising prices and anaemic real wage increases, the misery index is close to 6 per cent.

Given the long shadow cast by the political funding scandal and the state of the economy, the LDP is, in theory, due to a heavy drubbing from the electorate, said Temple university political scientist Jeff Kingston.

But, he added, the speed at which the general election has been called has given the opposition parties too little time to effectively co-ordinate.

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Noda, meanwhile, has so far failed to set out a distinctive economic programme or give voters a clear set of policy reasons for electing his party, repeating the mantra that Japan should vote out the long-incumbent LDP and allow Japanese politics space to change.

“There are lots of reasons why the LDP should suffer, but the fragmented state of the opposition is what could save them. I’m not sure that Noda is the man to lead the CDPJ into a bright future,” said Kingston, who added that voters had likely not forgiven the party for the brief but chaotic period it was in power from 2009 to 2012.

Still, the risks of a significant upset are there, say other analysts. Ishiba’s LDP party, in power more or less continuously since 1955 barring two short interludes, remains deeply split after its leadership election and Ishiba has done little to build unity.

The power balance in the House of Representatives, where the LDP controlled 255 of 465 seats before parliament’s dissolution, means the loss of just a couple of dozen seats would strip Ishiba of an absolute majority and give greater leverage to powerful foes within his own party.

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The LDP has also, for many years, ruled in coalition with the Komeito party, which has 32 seats but is weakening, and a handful of independents. If the coalition loses more than 46 seats, noted Harris, it will fall short of the 244-seat “stable majority” that allows it to chair, and hold a majority of seats on, each parliamentary committee.

While Ishiba — a train enthusiast and Japanese anime fan obsessed with defence issues — had personal popularity, he was not the “charismatic saviour” the LDP needed, said one party official. 

But Harris added that the chances were good that independent voters, especially younger ones, could reject the choice between the two 67-year-old political veterans and sit out this election. That could mean the election is decided by LDP grassroots supporters, who tend to like Ishiba and will leave the LDP’s majority intact. 

“The LDP looks likely to lose votes by quite a bit, but it’s unclear how big their loss of seats would be given that more voters may simply abstain and also split votes between opposition parties,” said Koichi Nakano, a political scientist and affiliate at the Weatherhead Center for International Affairs at Harvard University.

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“If there was a real two-party system . . . the LDP would be almost certain to lose power, but given the voter’s disaffection and the opposition fragmentation, the LDP may still weather the storm.”

Data visualisation by Jonathan Vincent

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Chinese equities and currency drop in early trading

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Chinese equities and currency drop in early trading

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Labour’s UK summit aims to attract foreign investors

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Donation can for international investment

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