Who Foots the Bill?
Taxes are the uninvited guests who never leave the party—universally unwelcome yet impossible to ignore. Despite widespread disdain for taxes, nowhere are those feelings more pronounced than in the United States. Indeed, most of us would prefer that someone else pay for them. Perhaps foreigners should pay our taxes. It would raise important revenues and would come from someone else’s pocket.
“Tariffs are taxes that are paid on foreign goods, rather than goods made by American workers.”
Consumption Taxes and Tariffs
This is a good narrative. Most countries have some form of consumption tax. Europe prefers the Value-Added Tax (VAT). Canada has the GST or the HST depending on the province. There are state sales taxes in the US as well. A consumption tax is charged universally on consumption. However, Trump’s tariffs are exempting domestic producers—discouraging consumption of foreign-made goods and encouraging domestic production. This is good politics.
Trump’s Tariff Tactic: A Hidden Consumption Tax
From Trump’s policy decisions, we can infer that his administration is promoting a consumption tax on all foreign goods (Europe is next). He just can’t call it a “tax” because an executive order only permits taxation on the grounds of a national security threat. I expect that this will ultimately need to run its course through Congress for approval to become permanent. But we should call it what it is, a consumption tax. Which by design, should fall to the House of Representatives to initiate formal legislation.
Trump signed a Free-Trade deal in 2018, the USMCA, to replace NAFTA and FTA before that agreement. We have enjoyed tariff-free trade for the last 36 years. The Auto Pact goes back 60 years. Now Trump has decided to reverse course, disrespecting those agreements by pinning a 25% premium on those goods in a shocking, bold, and fascinating move. Terrible for his neighbours, but fascinating because it puts the onus on Congress to address the situation as quickly as they deem appropriate.
Congressional Tug-of-War
There is a significant range of vested interests spread across the various chambers of both the House and Senate. People want exemptions for their constituents. However, the current tariff hammer is indiscriminate, and it will cause economic hardship. This should cause activity in Congress. Through proper debate, a legislative outcome should be less oppressive for Canada. But the message will likely feel the same—there is a cost to exporting to US consumers.
Trump’s Tariff Gambit
Trump only has four years to drive his agenda forward. He seems fixated on addressing the current account deficit. I believe there is sufficient evidence to argue that the deficit has created a meaningful surge in debt, and a constraint on government spending. As a means to fund an extension of his income tax cuts, it seems logical to use tariff revenue as a policy tool. Using tariffs to promote domestic job growth also seems reasonable. Having foreigners pay a domestic consumption tax also seems to have political merit. Overall, it may appear shocking and be the cause of economic hardship for trading partners, but with enough political capital supporting the plan, it could be made law.
The sum of the trade and tariff hysteria faced by Canadians and Americans alike probably includes some watering down of the tariffs as currently proposed—particularly in the automotive sector. However, some US-imposed tariffs will likely prevail, and Canada will inevitably reciprocate. Ultimately, consumers will pay more for goods, margins will come off their highs, and multiples will reflect an outlook far less certain than when Americans voted last November.
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