Opinion | The Debate Over Trump’s Favorite Word Needs a Reset

The debate over tariffs has run into a dead end of thoughtless gainsaying. “Higher tariffs are good,” one side says. “No, they’re bad,” says the other. The superficiality of the arguments is a shame because the subject is deep and fascinating. Tariffs are certain to be even more important in the second Trump administration than they were in the first. We need to understand both their pros and their cons.

In a perfect world, tariff rates would be zero across the board. Governments would not get in the way of transactions between consenting individuals. Alas, we do not live in that perfect world, so some tariffs are inevitable. The tough questions, then, include: Tariffs on which products? On which countries? At what rates? Temporary or permanent? Negotiated or imposed unilaterally?

A good place to start disentangling things is the argument ad nauseam over who pays for tariffs: the consumer or the foreign producer? Contrary to what both sides sometimes assert, the question has no simple answer. “Despite over a century of theoretical debate on the incidence of tariffs, sound empirical evidence on who bears the burden of trade tariffs is sparse,” according to a 2015 article in the University of Chicago’s Chicago Policy Review.

On Thursday, at the confirmation hearing for Scott Bessent as Treasury secretary, Senator Ron Wyden, the Oregon Democrat, said of Trump’s planned tariffs, “You can call it whatever you want in terms of trying to gussy it up. They’re going to be paid for by our workers and small businesses.”

“Senator, I would respectfully disagree,” Bessent responded. Unfortunately, his answer got confusing fast. He referred to the history of optimal tariff theory, then buzzed through currency appreciation, “various elasticities,” possibly changing consumer preferences and Chinese price-cutting.

Despite his gussying, Bessent came closer to the truth than Wyden in that exchange. It’s true that up front, a U.S. tariff is levied on Americans, not foreign producers. But what really matters is who bears the ultimate cost. If the foreign producer continues to charge the same amount at the border, then the final price goes up by the amount of the tariff and the American bears the full cost. But if the foreign producer cuts its price at the border by the amount of the tariff so that the final price paid by the American is unchanged, then the foreign producer bears the full cost of the tariff.

Typically, the cost will be split based on how much market power each side has. Americans won’t have to bear much of the cost of the tariff if the foreign producer lacks market power — that is, if it faces a lot of competition and is willing to accept a smaller profit to hang on to its share of the U.S. market. That calculation will vary product by product.

President Trump’s passion for high tariffs seems to be bound up in rage, machismo and grievance, but some of the people surrounding him, including Bessent, appear to have thought things through a bit more clearly. It’s worth hearing them out even if you eventually conclude, as I have, that they go too far.

Among economists, the main argument against tariffs is that they distort the market and create costly inefficiencies. For example, they induce customers to buy things from high-cost domestic producers instead of low-cost foreign producers. Better to have each country produce what it’s best at and import the rest. In theory, currency exchange rates will adjust so each country’s workers are fully employed and trade is balanced.

In reality, though, trade is not balanced and workers are not fully employed in every country. China just ran a nearly $1 trillion trade surplus. Domestic consumption is weak so the country is keeping its workers busy producing exports — which wipes out jobs in the United States and other trading partners. That’s a beggar-my-neighbor policy.

In such circumstances tariffs can potentially reduce, rather than cause, distortions. That’s the case if, say, the foreign producer is actually the high-cost source, but it’s being subsidized by its government. Then the tariff is correcting an inefficient outcome: two wrongs really can make a right. That was the Biden administration’s logic in raising tariffs last year on Chinese steel, aluminum, chips and electric vehicles.

That’s not the only legitimate basis for tariffs. Even free-traders agree that narrowly drawn tariffs can be justified on grounds of protecting sectors that are crucial to a nation’s security. Some might also accept temporary tariffs that give “infant industries” time to establish themselves before they face foreign competition. It’s just important to keep those exceptions from becoming giant loopholes.

“Tariffs are neither a panacea nor necessarily injurious,” Michael Pettis, a senior associate at the Carnegie Endowment for International Peace, wrote in Foreign Affairs in December. “Their effectiveness, like that of any economic policy intervention, depends on the circumstances under which they are implemented.”

As Pettis framed it, tariffs amount to a tax on domestic consumption and a subsidy to domestic production. That’s not always a good combination, but it might be precisely what the United States needs right now to correct its huge and chronic trade deficits, Pettis argued.

“Tariffs may not be an especially efficient way for industrial policy to force this rebalancing from consumption to production, but it has a long history of doing so, and it is either very ignorant or very dishonest of economists not to recognize the ways in which they work,” Pettis wrote in a series of social media posts in November. “To oppose all tariffs on principle shows just how ideologically hysterical the discussion of trade is among mainstream economists.”

Oren Cass, the chief economist at American Compass, a think tank, made a case similar to Pettis’s at the annual meeting in San Francisco of the Allied Social Science Associations this month. Cass identifies as both conservative and pro-labor. “We’ve erased millions of livelihoods” by allowing the huge U.S. trade deficit to persist, Cass wrote in a guest essay for The Times last month.

Also in the pro-tariff camp is Stephen Miran, Trump’s pick to chair his Council of Economic Advisers, who wrote a report in November, before he was chosen, that laid out the case for imposing tariffs “in a manner deeply intertwined with national security concerns.” (He said he wasn’t advocating any particular policy.) The thrust was that countries that want to be protected under America’s security umbrella need to do more to help get the United States out of its deep hole in trade.

The U.S. dollar is “persistently overvalued” because there’s strong demand from outside the country for dollars to acquire American assets, which are perceived as safe, Miran, who has a doctorate in economics from Harvard, wrote. The dollar’s overvaluation leads to chronic trade deficits by making American products expensive to foreigners, and foreign products cheap to Americans.

On that, I think Miran is hard to argue with. Last year I interviewed Richard Koo, the chief economist of Nomura Research Institute, who made the same point.

All these valid perspectives aside, though, “tariff” is not the most beautiful word in the dictionary, no matter what Trump says.

One crucial point that Trump either doesn’t understand or refuses to grapple with is that tariffs can either raise money or protect American jobs, but not fully do both at once. If they raise money, it’s because foreign goods are still coming in and being tariffed. But that means jobs aren’t being protected. Conversely, if they reduce the flow of imports, then there’s less stuff to put a tax on and so money isn’t being raised. In practice, tariffs achieve a little of each objective.

A related conundrum for Trump is that when tariffs go up, the dollar tends to get stronger. That’s because a smaller trade deficit shrinks the supply of dollars accumulating in foreign hands. The dollar’s extra buying power then shields Americans from paying higher prices on imports, which is nice, but it takes away the financial incentive to shift to domestic products, which isn’t so great.

Miran is aware of the trade-offs. It’s just that he can live with them. Let’s say the dollar’s rise exactly offsets the higher tariff so that Americans are paying the same amount for imports as before. That’s fine, he argued in his report. “Since the exporter’s currency weakens, its real wealth and purchasing power decline,” he wrote. The upshot is that “the exporting nation ‘pays for’ or bears the burden of the tax, while the U.S. Treasury collects the revenue.”

Unfortunately for tariff advocates, the dollar’s rise doesn’t just hit the wealth of trading partners; it also hurts American exporters, which become less competitive. Miran acknowledged this. He also acknowledged that the more a tariff helps domestic production, the less revenue it will raise.

There’s also the not-so-small problem that trading partners will raise tariffs on the United States in response. “Retaliatory tariffs by other nations can nullify the welfare benefits of tariffs for the United States,” Miran granted.

This is where the intertwining with national security comes in. The Trump administration, Miran suggested, “could declare that it views joint defense obligations and the American defense umbrella as less binding or reliable for nations which implement retaliatory tariffs.” That’s playing hardball. (It also won’t work with China, which is America’s biggest trade problem and decidedly outside the U.S. defense umbrella already.)

An alternative to raising tariffs is lowering the value of the dollar via a Mar-a-Lago Accord with trading partners, but that’s not easy either, Miran admitted: “As things stand, there is little reason to expect that either Europe or China would agree to a coordinated move to strengthen their currencies,” since doing so would reduce their competitiveness in trade.

“A series of punitive tariffs” might make them “more receptive” to a currency deal, Miran wrote. The Trump administration could also take unilateral measures to lower the dollar’s value if trading partners balked, he added. Remember, though, that the dollar naturally goes up, not down, as the trade deficit shrinks. “The mixes of sticks and carrots may be extremely challenging to get right,” Miran conceded.

The path to success for Trump’s trade agenda, Miran concluded, is “narrow,” and “will require careful planning, precise execution and attention to steps to minimize adverse consequences.”

The path to failure, in contrast, is rather broad. Prices go up. American companies become less competitive on global markets because they pay more for imported parts. Trading partners retaliate with tariffs of their own. Efforts to bring down the dollar’s value damage its effectiveness as a diplomatic tool.

“Would trade restrictions or immigration barriers help?” Kimberly Clausing, an economist at U.C.L.A. School of Law, asked rhetorically at a panel with Cass in San Francisco. “The resounding answer is, it would hurt the people you’re intending to help.”

Elsewhere: Unlicensed, But OK

Nail salons in Connecticut were clean and safe even during a period when licenses to operate them were not required. Barbershops in Alabama were also clean and safe even though the state licenses them less onerously than other states do. That’s according to a new report, based on state inspection data, by the Institute for Justice, a nonprofit law firm that favors removal of licensing requirements in many professions. According to the report’s author, “salons and shops have every reason to keep standards high with or without licensing — no one wants to dip their toes into a grimy foot spa or sit in a dirty barber chair.”