Tony Kinnett interviews expert public finance economist EJ Antoni to understand the different uses and impacts from tariff policy as the Trump administration targets trade deficits with this economic tool. Antoni is a research fellow in The Heritage Foundation’s Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.
Tony Kinnett: What are your thoughts on the list of tariffs right off the bat?
EJ Antoni: Oh, a lot of mixed feelings. Let me just say, first off the bat, I really do actually like the president’s strategy here. I like the idea of reciprocal tariffs.
In other words, if you’re going to put trade barriers in place for our exporters, if you’re not going to give us access to your consumer markets, then we’re going to turn around and do the same thing to you. And the reason that’s such a good strategy right now for the US is that so many of these countries need access to our consumer markets much more than we need access to theirs. In other words, although there’s no winners in a trade war, they’ll lose much more than we will.
And that’s why, frankly, President Trump has already had a lot of success in these negotiations. Even before the April 2 announcement, he already had a lot of countries that were essentially coming to him and saying, “Look, we’ll do whatever you want, just please hold off on these tariffs,” because they know it would hurt them so much. So that’s all been very positive.
Tariffs have proven to be an an exceptional tool when used for statecraft. And by the way, that’s also how Ronald Reagan used them, more than once. Reagan pointed out—
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Kinnett: Pause just a second, and I want to get back to Reagan. I come from Middle Western—I’m Eastern Central Indiana, right? I come from a factory family—my mom, a brilliant nurse. [My] dad—phenomenal factory worker—now an excellent farmhand. I come from common ground stock folk. When you say tariffs used to statecraft, what do you mean?
Antoni: I mean, we’re not just using tariffs for this protectionist idea of, oh, if we just put tariffs on everything, somehow the American economy will boom. That’s not the case. Neither economic theory nor economic history suggests that that would be true.
So those who are kind of cartoonishly saying, “Let’s just tariff everything and we’ll have a roaring economy,” it’s nonsense. But, also, the people who are dogmatic in the other direction, where they say, “Under no circumstances should we ever use tariffs ever at any point in time,” that’s also incorrect. Tariffs can be used to great effect for a lot of different ends.
Sometimes that’s, again, like for statecraft, where we’re trying to get Mexico to put troops on their border to stop the flow of illegals and to stop the flow of fentanyl.
Kinnett: To get Colombia to take back their own illegal immigrants that originated from their territory.
Antoni: Right, exactly. So, Trump has had a lot of success in those regards. He’s also had tremendous success in securing investment for the United States, thus far over $5 trillion.
I mean, that’s an eye-watering number that I, personally, did not think he was going to be able to meet anywhere near this point in time. In other words, I thought it would be well over a year into his presidency before we saw those kinds of numbers. So again, Trump has used tariffs to great effect in a lot of different ways.
Tariffs can also be used, by the way, to simply generate revenue in the same way that we tax domestic transactions, like when we have an income tax, you can tax international transactions. That’s what a tariff is. And, before we had the federal income tax, the government got essentially all of its revenue from tariffs.
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So again, it’s not as if tariffs are always and everywhere some kind of deadly, like a poison pill for the economy. But likewise, putting tariffs on everything is also not going to be some kind of cure-all. So we have to talk about tariffs in the context of the current situation, which is, yes, we’re going to impose tariffs, but we’re also going to deregulate.
We’re also going to cut taxes. So that’s a very positive combination. So again, this is all part of the context.
Now, also part of the context here, unfortunately, is the fact that this was billed as reciprocal tariffs. In other words, like I said earlier, we’re going to do to you what you do to us. We’ll impose the same kinds of effective tariff rate as you’re imposing.
So, countries will do not just tariffs, Tony, but they’ll also do, as you know, non-tariff barriers that would include things like quotas or currency manipulation. For China, it includes subsidies to industry, dumping of artificially cheap products in other countries, utilizing slave labor, etc. Those are the kinds of things that we were supposed to target.
Instead, in this rollout on April 2, the administration just used tariff rates that seemed to just target trade deficits, and not even overall trade deficits, but just the deficits in terms of the goods deficit. In other words, we’re not including the services component.
Kinnett: I’ll actually be the one to step on the landmine here and shove my lovely size 12 foot into my mouth. The individuals on social media who have run the algorithm suggesting that if you look at the proposed rates the White House interprets the trade barriers—And by the way, they do openly admit that these are tariffs other countries are charging on us, and economic factors and trade barriers and things, right?—that they’re open, that this is a combination. But it does appear to be the perceived trade deficit weighed against a few other economic indicators. Beyond just to see, I mean, we’ll have the graph on screen when I’m talking about this—it’s a pretty direct line of correlation here. And it gives me the skeeves a bit because, I mean, we buy a lot of gas from Canada, right? I mean, we do traffic a lot of fuel, even from Alaska through Canada to the United States, something that we’ve done, you know, would rather buy it from them than Russia or Saudi Arabia.
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But we don’t sell a lot of fuel to Canada because that’s what they’re selling us. I mean, there’s an inherent trade deficit there. Am I reading that completely wrong here as far as the inherent evil of a trade deficit in and of itself?
Antoni: Well, Tony, you know, we can debate whether or not a trade deficit with the rest of the world is problematic. In other words, is it okay if the United States perpetually has a trade deficit with everyone? That’s a separate debate.
Kinnett: I don’t want to say “debate” here because I’m just relaying what I have seen as how this was calculated that the White House has put out as a negative.
Antoni: I’m just trying to make the point that even if you want to have the idea of a trade deficit with everyone, that’s a separate issue. What this is doing, however, is this is targeting trade deficits with individual countries. And you would be hard pressed, I think, to find any economist worth their salt who would say a trade deficit with a particular country is a problem. Particularly, when we’re not even talking about the overall trade deficit, we’re only talking about the deficit in terms of goods here—products.
So, there are some countries, for example, on this list, that are being slapped with punitively high tariff rates because they have a goods deficit, but we have so much of a services surplus that the overall goods and services trade combined is actually a surplus for the United States. And so again, it doesn’t make any sense.
We are actually, in many instances, again penalizing countries that have zero trade barriers. Meanwhile, China gets just a middle of the road of an average tariff rate, and Iran gets hit with the minimum rate of 10%. So, what I would like to see, Tony, is something that actually approximates the real trade barriers that other countries are imposing.
That’s what we should be going after. That’s true reciprocity. And frankly, that’s what President Trump promised us. And I think his team has really let him down with this proposal.
Kinnett: I really appreciate your clarifying that, because again, as someone who—I get basic macro and microeconomics—when you look at history as a whole and you observe how the economy functions, you look at how currencies function, it’s hard not to pick some of that stuff up along the way. But as my producer, Daniel, constantly reminds me, I don’t have that masters in economics.
I have heard a lot of people, however, make the case that we need these really high tariffs on the long-term because of the golden age of American automobile manufacturing, that there was this golden age where everyone was working on the assembly line of GM or Ford or whomever, and that that created the strong industrial base that we can return to. And I’m detecting a little bit of the poison of—or maybe the rose-tinted glasses of nostalgia creeping into defining policy.
Look, my dad lost his job when I was in elementary school, middle school. His automotive—well, he worked for Dana in Richmond—that went to Mexico. That’s never come back. That horribly hurt our family. But I don’t know if I’m seeing this as a bulwark for future productivity. Can you help me parse that out? I feel like I’m staring into the weeds here.
Antoni: Tony, great, great questions. I think one of the things we have to keep in mind is, again, tariffs are not some kind of economic cure-all. A lot of the reasons why these different car companies have shipped their factories overseas has to do with what we have done to ourselves, not just what other nations have done to us.
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So, I can give you two quick examples. One is the fact that we actually, because of the crazy way our tax code is constructed, we give preferential treatment essentially to things that are made overseas and shipped here. That’s why a lot of people are now talking about how we need a border adjustment tax, which works kind of like a VAT does.
And Europe is really big on using VATs, these value-added taxes. So that’s something to consider. We need to fix problems in the tax code.
We also need to fix problems in the regulatory state. It’s not uncommon, Tony, that if the average manufacturing employee, let’s say, makes $50,000 or $60,000 a year, that the manufacturer, the employer, is paying another $50,000 to $60,000 per year in regulatory compliance costs. Now, the employee never gets to see a dime of that.
That’s just an additional cost imposed on the employer. And so, what looks like, again, a $50,000 or $60,000 employee can be somewhere between a $100,000 and a $120,000 employee from the perspective of the manufacturer. And again, this has nothing to do with international trade.
Now, you throw on top of all these self-inflicted wounds the fact that a lot of other nations do impose very strict trade barriers on us, where it makes it essentially impossible for us to sell those cars abroad. That decreases the demand for American cars around the world, which decreases the demand for labor in car factories. And that results in fewer Americans employed and it results in slower wage growth for the Americans that remain employed.
So, all of those things are obviously negative effects, but it’s only the last component that you can really have any kind of effect on if you’re going to be implementing tariffs. Tariffs are not going to fix the other problems. And so that’s why we talked about earlier, we’re looking at tariffs in the context of fixing the regulatory state, fixing the tax code.
All these things have to go hand in glove together if we’re really going to have any kind of manufacturing renaissance.
Kinnett: And based on that, some conversations that I’ve both watched and listened to, as well have had with a couple of friends kind of in the political sphere, the argument that I’ve seen best articulated, because I can’t help it, even though I always advocate for marathon solutions, I enjoy the quick fix as much as the next guy. Wouldn’t a quicker fix here, instead of a massive tariff slap, to be the carrot rather than the stick? Instead of trying to lure companies like auto industry companies back to the United States under the threat of tariffs, wouldn’t it be more effective to slash the corporate tax rate for products that are made—the more that is produced here in the United States, the lower your corporate tax rate will be? Again, I’m just throwing that out into the ether.
Antoni: Tony, it’s a really good question. I think the reason why the administration is taking the approach it is, instead of the kinds of things you’re talking about, is because the latter need congressional action. The president can’t, through executive action, through these different emergency powers, simply start slashing marginal tax rates.
That’s something that Congress is going to need to do. Also, when we talk about things like just a 10% across-the-board tariff that the president implemented as part of this, that’s really something I think that technically Congress should be doing as well, because now you’re talking about something that’s really just a revenue measure. Again, that’s a good use for tariffs.
But, it doesn’t really seem like, again, that the kinds of really good solutions that you’re thinking of are things that are in the president’s purview right now.
Kinnett: Well, I really appreciate you’re taking a couple of minutes to wander through my ADHD-rattled brain with the questions that I have. Again, when it comes to this stuff, I’d rather stand on the shoulders of giants. And so, EJ.
Antoni from The Heritage Foundation, thanks for taking a minute to stop by and break some of this down with us.
Antoni: Tony, my pleasure. Thank you for having me again.
