Tuesday, December 6, 2016

Tariffs to Fund Infrastructure, a plan for President-Elect Trump

Donald Trump has made fixing trade a centerpiece of his agenda.  He has repeatedly called to end the practice of outsourcing American jobs to other countries.  He has also repeatedly threatened high tariffs to those companies that do outsource jobs.  Numbers quoted have included a blanket 35% tariff.   A second piece near the center of his agenda is rebuilding American infrastructure, where he has called for $1T investment over the next 10 years.  That infrastructure in the US is badly in need of repair and upgrade is not in question.  He has often spoken of how other countries have shinny new airports, roads, damns, bridges, etc. while those in the US look dilapidated comparison, and few could argue with that. 

Information about how Mr. Trump plans to implement this infrastructure plan have slowly trickled out in the forms of various quotes, briefings, reports, etc.  One of the features appears to be a form of privatizing infrastructure where private companies will pay for the work and then collect a toll or fee for its use.  This is probably not feasible for the majority of infrastructure projects, nor is it advisable in general.  The American people will not likely be in favor of selling off the US Interstate system, all the bridges and tunnels, the water systems in towns, etc.  Doing so is just another short term fix that puts the public in hoc in the future to endless user fee increases.  The problems with the initial idea appear to be so pronounced that Mr. Trump is now said to be reducing the amount to spend on infrastructure to only $550B to appease those in his party who would rebel against any significant deficit spending on infrastructure.

A better solution is to combine these two pieces of the agenda into a single, self-funding package.  Use the funds generated from tariffs on imports to fund the infrastructure projects.  This would provide for the $1T of spending on infrastructure and much more. 

In 2015 the US imported $2.25T of goods (census figures) [1].  If even a 5% average tariff were applied to the import of these goods that would more than cover the suggested spending on infrastructure.  The 5% figure is an average.  Specific tariffs would depend on the particular goods and the source country as the balance of trade with that country will be the main determinant if tariffs are an appropriate mechanism to use in trade policy. 

The US ran up a total deficit of $745B in that year.  With nearly half, $365B, coming from China [2].  No wonder China is Mr. Trump's favorite target in regards to trade agreements.  The US also had a trade deficit of $60.6B with Mexico [3], another of Mr. Trumps trade targets.

As described in previous postings the main purpose of tariffs should be twofold.  First, to balance trade so that long term imbalances don't cause the kinds of dislocations in the economy like we have experienced here in the US for the last few decades causing the kinds of job loss and consequent stagnation or loss of standard of living for many Americans.  The second is to protect high-tech, high-value, and high-wage industries as these yield the highest prosperity for the country.  High-tech industries in particular tend to also be high-value and high-wage industries.  Further, future technology grows on current technology.  So, creating and maintaining a cutting edge, technology environment is key to sustaining and growing a modern economy.

Given the high level of the trade deficit with China a high tariff may be needed to bring this figure into balance.  Indeed, more than balance a trade surplus with China is needed to offset the many years of trade deficit that have accrued.  Perhaps a tariff as high at the 35% tossed around by the Trump team is in order after all with regards to China?  The US imported $483B from China in 2015 and if a 35% tariff was applied that would have yielded $169B from that country alone.

Tariffs could provide a meaningful and ongoing source of funds for the infrastructure projects that the incoming Trump administration proposes.  He should consider linking the two to create a revenue neutral plan that his Republican colleagues can live with.  Perhaps even delaying the implementation of the proposed corporate tax cuts until the tariff and infrastructure issues are settled.

[1] http://www.census.gov/foreign-trade/statistics/historical/goods.pdf
[2] http://www.census.gov/foreign-trade/balance/c5700.html 
[3] http://www.census.gov/foreign-trade/balance/c2010.html

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