Trump’s biggest gamble yet

Rick Newman
Senior Columnist

It’s a mantra of political orthodoxy: You can’t raise taxes on voters if you hope to get reelected.

Yet President Trump is doing just that, through new tariffs on billions of dollars worth of consumer goods imported from China. Many of those goods will soon be more expensive.

The tariffs began on Sept. 1, with a new 15% tax on about $112 billion worth of Chinese imports per year, including clothing, shoes, printers, scanners and plastic goods. On Dec. 15, the same tariff is due to hit another $155 billion worth of Chinese imports, including electronics and smartphones. All told, economists at JP Morgan Chase and elsewhere think the Trump tariffs, including some he has already imposed, will cost each American household $1,000 or more per year.

The Sept. 1 and Dec. 15 tariffs are different from earlier rounds, because they’re the first to raise the cost of finished consumer products. Prior Trump tariffs targeted components and industrial products, with producers bearing most of the higher costs, rather than consumers. The new tariffs, however, are likely to lead to price hikes retailers will blame on Trump.

You’re not supposed to be able to get away with this, if you’re a president running for reelection. The poster child for tax-hike self-sabotage is the late Republican George H.W. Bush, who famously said while running for president in 1988: “Read my lips. No new taxes.” But a bipartisan spending bill he signed as president two years later included an increase in the top tax bracket, from 28% to 31%, along with higher taxes on yachts and other luxury items. Breaking his own 1988 pledge is one likely reason Bush lost his 1992 reelection bid to Bill Clinton.

President Barack Obama approved a couple of targeted tax hikes prior to his reelection bid in 2012, including new taxes on tanning services and medical devices as part of the Affordable Care Act. But Obama never said “no new taxes,” and the tax hikes affected very few people. After he won reelection in 2012, Obama allowed a temporary tax cut for the top 1% of earners signed by his predecessor, George W. Bush, to expire on schedule – a de facto tax hike on the wealthy. But Obama wasn’t running for reelection at that point.

Trump’s new tariffs are part of the trade war he’s been waging with China for a year and a half, which is beginning to show signs of sapping the economy. The manufacturing sector is now shrinking, as producers struggle with higher input costs and more barriers to exports as China and other countries retaliate against Trump’s tariffs. The slowdown hasn’t yet hit consumers, but if it does, Trump has set himself up as the villain.

Will voters care about tariffs?

What’s he thinking? Nobody ever knows, but here are 5 possible reasons Trump may think he can raise taxes on consumers and still win their vote:

1. He can convince people tariffs aren’t taxes. When Yahoo Finance ran a recent story explaining the new tariffs, dozens of readers wrote in to say we had it wrong because tariffs aren’t taxes. They’re wrong. Financial education site Investopedia defines a tariff as “a specific tax levied on an imported good at the border.” The Tax Policy Center explains that “a tariff is a tax on imported goods.” Merriam-Webster says a tariff is “a schedule of duties imposed by a government”—and it defines “duty” as “a tax on imports.” This is not a matter of opinion, interpretation or belief. Tariffs are taxes. End of story.

A truck passes by China Shipping containers at the Port of Los Angeles, after new tariffs on Chinese imports was imposed by President Trump, in Long Beach, Calif. on September 1, 2019. (Photo by Mark RALSTON/AFP/Getty Images)

2. Trump can convince voters somebody else pays the tariffs. Trump repeatedly says the Chinese are paying his tariffs. That is also incorrect. American importers pay the tariff to the Customs Service and the money ends up at the U.S. Treasury. There’s no rebate process that forces Chinese importers to pay. The American firms paying the tariff might be able to offset part of the higher cost by negotiating lower prices with their Chinese suppliers. But that’s not guaranteed. They can also try to substitute imports from other countries that aren’t subject to the new tariffs. But in many cases there aren’t substitutes for the massive amount of stuff we import from China. That means at least some of the cost of the tariff will hit American consumers as higher prices, and American businesses as lower profits.

3. Maybe voters won’t notice the tariffs. Will shoppers really catch on if the price of a pair of shoes goes up by a couple bucks? Maybe not.

4. Maybe they’ll notice but won’t care. Some Americans support Trump’s approach to China and are willing to pay more for things if it forces China to stop cheating on trade.

5. Maybe the whole thing will be over before the 2020 election. If Trump gets some kind of trade deal midway through 2020, and revokes the tariffs, it’s possible he can declare victory with no political harm. By the time Americans vote next November, the tariffs could be a distant memory.

The risk for Trump is that China digs in and refuses to grant a deal on terms he can accept. If that happens, Trump would have to keep the tariffs in place or else capitulate to China by removing them. And the tariffs will harm the economy more the longer they stay in place. Voters are already poised to blame Trump if the economy slows or a recession forms. So maybe they’re not that accepting of tariffs after all.

Trump operates far outside the mainstream on many issues, including immigration, guns and trade. He may think he has a unique talent for political survival. But voters who took a chance on him once won’t do it twice if they feel burned.

Yahoo! Finance Morning Brief

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available. Click here to get Rick’s stories by email.

Read more:

The Trump Recession is starting to take shape

Obama was better for your 401(k) than Trump has been

Democrats are blowing it on climate change

Medicare for all won’t work. This might

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.

Yahoo Finance All Markets Summit