Truth or dare: Close the deficit in clarity over the impact of Trump’s tariffs

To her credit, she already seems to have made the briefing room ‘great again.’ At least in terms of a big viewership boost for briefings. Dull moments are scarce. One video clip in the race for virality on social media features her feisty defence of Trump’s claim that US trade partners are ripping America off. 

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“Tariffs are a tax hike on foreign countries and a tax cut for the American people,” says Leavitt. This prompts a quick question from an unseen reporter. “Have you ever paid a tariff?” he asks, adding, “I have. They don’t get charged on foreign countries.” Leavitt’s response is a brush-off: “I think it’s insulting that you’re trying to test my knowledge on economics.”

Much of the world as we knew it has been upended ever since Trump got back into the White House, but is Economics 101 up for revision too? Not if we can help it. That import tariffs—or what we call custom duties in India—are a form of taxation is true. 

From a policy perspective, however, we must never lose sight of who ultimately bears the burden of a tax. Its incidence, after all, could differ from its impact, depending on how it’s levied. If it is a direct tax, like charges paid on one’s income, then there’s far less scope for confusion. Its incidence falls squarely on the taxpayer, who is legally responsible for its payment. As this burden cannot be shifted, it directly impacts the payer’s finances. Such taxes are usually progressive, with a rising scale of rates—so that richer folks fork out a larger chunk of their earnings than those who earn less. 

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In contrast, levies on products and services are called ‘indirect’ because entities that are obliged by the law to pay these can pass the charges along to their customers. Almost invariably, the final cost is borne by those who buy these items, as they pay higher prices. An example is GST added to bills. Another is any tariff imposed on imports. It must be paid by importers, whether they are local traders or units of foreign businesses shipping stuff into a country to sell locally. 

Either way, tariffs translate to bloated expenses for buyers of imported goods. Of course, they also act as trade barriers, so exporters in other countries face a slump in demand for their shipments, often leading them to howl in protest or retaliate, but tariffs do not result in foreigners filling a country’s tax coffers. Nor can they raise sufficient revenues to achieve anything more than a slight cut in domestic taxes. What they could do, though, is make a taxation system less equitable on the whole. 

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Indirect taxes are inherently regressive. On every taxable item, an indirect levy extracts money at the same rate from rich and poor buyers alike, which means the latter must pay a larger slice of their income. This is unfair, but lack of public clarity over who takes the blow can let a government get away with it.

No doubt, tariffs have other significant effects too. Reduced exposure to price rivalry from abroad can enrich local market players, for instance, with arbitrary rate rejigs making space for cronies to be favoured. The game being played by the Trump White House is hard to make out, as its tariffs are long on rhetoric, short on specifics and given to constant flux. Still, what’s evident is that US trade policy has been packaged for a post-truth world.