Expert: New tariff policy will be economic turning point for global trade

CHRIS FARRELL: All right, Well, this is Minnesota Now, and I'm Chris Farrell filling in for Nina Moini. And let's turn to tariffs. President Donald Trump's vision for global trade could become a reality this week. Under the current tariff proposal, Americans will see an average tax of 18.3% for imported products. That's the highest rate since 1934.

And that's according to the Budget Lab at Yale. It's a nonpartisan policy research center. As with past tariff announcements and trade deals, now there is a chance for things to change. But to help us understand where things stand right now is Louis Johnston. He's an economics professor at the College of Saint Benedict. Louis, welcome.

LOUIS JOHNSTON: Thank you, Chris. It's nice to talk to you.

CHRIS FARRELL: All right, well, set the stage. What exactly is set to take place on Friday?

LOUIS JOHNSTON: Well, what's set to take place is a bunch of these agreements or letters that the Trump administration has put in place where they have raised tariffs on a variety of countries, anywhere from 10% to some approaching 40% on purchasing any products that are produced from those countries and brought into the United States.

A little context that I think that you were getting at, but I want to emphasize, is that if you go back to January 1 of this year, the average effective tariff in the United States on bringing goods in was 2.5%. So we're talking about a movement from 2.5% to close to 20% in the course of just eight months.

CHRIS FARRELL: And the way to think of this is a tax. It's a tax on appliances, I mean, if it's imported. A tax on appliances or any sort of imported good, you're going to pay a tax of almost 20%.

LOUIS JOHNSTON: Exactly, exactly. And that's something that when we teach intro to econ, we always emphasize. There's the question of who actually collects the tax and sends the government its money. That's the people who are bringing the goods into the country, the washer, dryers, or the clothes or whatever. They have to pay the bill to the government.

But the more important question is, where do they get the resources to do that? Well, they can take it out of their profits. They can take it out of their workers' wages, or they can try to pass it along to the consumer. And of course, it's going to be all three.

CHRIS FARRELL: Right. Because one of the things that's been happening right now, isn't it that the tariffs, these taxes haven't shown up in consumer prices as much as many economists expected back in April when you had Liberation Day, the first big announcement about tariffs?

LOUIS JOHNSTON: Right. I thought a lot of it would just get passed on in higher prices. But a lot of businesses have decided to eat them for the moment. But that doesn't mean that we aren't paying them somewhere along the line. It just means that perhaps people who work for companies that have a lot of imported inputs or sell a lot of imported goods, their wages are not going to rise as fast as they otherwise would, or maybe they're even falling.

Or shareholders of companies that are involved in this trade are not going to see the value of their shares go up, or they might miss a dividend. So it's showing up, but it's not just showing up in a jump in prices.

CHRIS FARRELL: So this has the potential to be a hinge in economic history. I mean, you think about what's gone on the past 80 years, and now we're back to 1934, at least when it comes to tariff rates. So how dramatic a moment is this?

LOUIS JOHNSTON: I think this is one of-- you put it well, that it's a hinge. You can identify a few of them in America's economic history, especially its globalization. August 15, 1971 is the day that Nixon closed the gold window so that we weren't trading dollars for gold. I think this period is going to be known as the one where the United States turned its back on the international economy, or at least kind of tilted its back, maybe not completely turned its back.

But we've spent the period since the Second World War, and as you said, since 1934 especially, trying to drive down tariffs, trying to open up the international economy, trying to create an international trading system that allowed individuals and companies to move goods, and services, and people all over the world with the lowest possible costs. And the goal of that was to benefit primarily consumers, to benefit them with lower prices for the things that they bought.

Well, this policy totally reverses that. The idea here is to benefit companies, especially American companies. And if that results in higher prices for consumers or a narrower range of goods and services for those consumers to buy, that's the price that we're going to pay.

CHRIS FARRELL: So one of the key areas for judgment or judgment calls is just as you were saying, is to bring back manufacturing to the US, many things that have been outsourced to China or Vietnam or Switzerland, elsewhere in the world. Is this the kind of strategy that can work to bring back manufacturing to the US?

LOUIS JOHNSTON: Well, I don't think so. And it could. But here's one of the things that I think is quite interesting about this. President Trump himself was asked a couple of months ago, well, do you want to bring back things like making t-shirts and other kinds of textiles and things? And he said, no, no, no, we'll leave that aside. We want to make the big stuff. We want to make machines and things like that.

Well, you can't do economic policy well enough to set that up. That's just not feasible. And I just don't see that having blanket tariffs the way that the administration is setting it up is going to benefit American manufacturers in a way that is going to end up benefiting American workers very much.

CHRIS FARRELL: So what's the endpoint? Are we near the endpoint, or are we just going to have OK, Switzerland's 39% right now or going to be 39% and maybe it'll be 25% three weeks from now?

LOUIS JOHNSTON: I don't think there is an endpoint. I actually think that that is the nature of this policy, that a lot of us have been bemoaning the uncertainty created by it.

And I'm convinced now that that actually is the point of the policy, to keep all of our economic competitors off balance, to keep other governments off balance, and, in a sense, be able to pull surprises and affect economic decision-making by coming up with new policies or changes. And I think, at least from the point of view of economic theory and policy, that that's a terrible way to manage economic policy.

CHRIS FARRELL: So The New York Times had an intriguing story. You probably saw it over the weekend that tariffs are generating revenue. And once you start generating revenue, are you going to give that up?

LOUIS JOHNSTON: And someone once said tariffs are easy to impose but difficult to remove. They're a tax. And once you start getting that revenue, it's very nice to continue getting that revenue. What seems to be not coming through in the conversation seems to be that that's what's going on here.

The Trump administration and Congress have imposed one of the largest tax increases that we've seen in the United States in many, many years. But we don't seem to recognize that or call it that, but that's what's happening. And when you raise taxes, you get revenue.

CHRIS FARRELL: So in the minute left, OK, you've been skeptical. Most economists have been skeptical of tariffs. Economic journalists have been skeptical about tariffs. Investors are not.

LOUIS JOHNSTON: Yeah, I think-- well, I think they are in the sense that they're waiting to see what happens. And I think that once they start to see some of the effects of these things, there might be a real-- run isn't the right word, but a real turning of their strategy of saying, maybe we shouldn't be investing the way we are. Maybe we should be shifting some of our money into more safe assets, or maybe even we ought to be putting more of our money abroad, where trade is continuing to grow and thrive.

CHRIS FARRELL: Well, thank you very much for your time.

LOUIS JOHNSTON: You're welcome. Thanks for asking.

CHRIS FARRELL: Louis Johnston is a professor of economics at the College of Saint Benedict.