It is darkly ironic that US President-elect Donald Trump has enacted so many policies beloved of the far left.
At a rally in New York on September 18, Trump announced: “While working Americans catch up, we’re going to put a temporary cap on credit card interest rates; we’re going to cap it at around 10 percent. We can’t let them make 25 and 30 percent.”
Even Bernie Sanders finds himself to the right of Trump on this issue, having ‘only’ called for a cap of 15% in 2019.
Should this be done, Americans will soon find themselves with less access to credit than before as banks clear their books of high-risk (poor) customers.
Elon Musk will be ok, but poor people will find their credit options limited.
Americans hold $1.14 trillion in credit card debt, almost four times as much as South Africa’s total debt.
Not since senators Smoot and Hawley (*), has anyone loved tariffs more than Trump, even self-identifying as ‘Tariff Man’. Speaking at a roundtable with voters in Auburn Hills, Michigan, the Republican leader said he thought “tariff” was “the most beautiful word in the dictionary”.
“You have other words that are damn nice, like ‘love’,” Trump said, while others in the room laughed. “But I tell you, I think it’s more beautiful than ‘love’.”
As Tariff Man, Trump has proposed various tariff policies, including tariffs of up to 20% on all imports not out of China and 60% on Chinese goods.
In what appears to be a response to Chinese electric vehicle (EV) manufacturer BYD announcing that it was going to establish an EV plant in Mexico, Trump threatened to impose up to 2 000% tariffs on cars from Mexico if the investment went ahead.
Mexico, a member of the United States-Mexico-Canada (USMC) Free Trade Agreement, must be thrilled.
Mexico is America’s largest trading partner ($798 billion in 2023), followed by Canada at $773 billion in the same year. They rank as America’s number-one and -two export destinations, in that order. China is number three.
Trump loves tariffs so much, he has promised to replace income tax with tariffs. This was the state of affairs of most of the world in the time of President William McKinley (1897 to 1901, when he was assassinated), Trump’s favourite president.
Under McKinley, “the Napoleon of Tariffs”, import duties were raised from an average of 38% to 49.5%. The current average is 1.47%.
It could be argued that every strong and capable state in the world is built on income taxes, despite how much we hate them. Large portions of the poor world rely on tariffs for their revenue, barely collecting any income tax – 47% of Eswatini’s and 24% of Uganda’s revenue is collected from tariffs. In South Africa it’s 4% and in the USA about 2%.
Income tax works because it only taxes success. A company makes a profit or a person has a job before they need to pay income tax, whereas tariffs tax an activity (importing).
Trade is what creates economic value, which is why National Treasury is so loath to increase VAT rates, another tax that taxes activity (buying something). Trump’s localisation strategy, for that is what it is, aims to get factories to locate in the US, “creating American jobs”, but America is close to full employment, so even if the factories came, it is not clear who would work in them. Definitely not illegal migrants.
Trump’s deportation tzar, Stephen Miller, says “[y]ou grab illegal immigrants and then you move them to the staging ground and that’s where the planes are waiting for federal law enforcement to then move those illegals home”.
JD Vance, Trump’s Vice President, says it’s reasonable to deport a million people a year.
Even if they did find workers, those imports would not happen and so no taxes would be collected at the border. Given there is no income tax, it’s not clear where the revenue would come from to run the state and pay back the staggering debt America has to service ($36 trillion as of October 2024). Maybe sales taxes will be increased locally?
Trump assumes there will be no retaliation, a poor assumption in 1930 when the Smoot-Hawley Act was passed, and a poor assumption now. Smoot-Hawley attempted to localise production and subsidise farmers, but most economists agree, ended up adding years to the Depression as America faced savage retaliation from its trading partners.
This is a reversion to crude mercantilism and the bullying of smaller nations by the hegemon, but the world doesn’t look like it did in the golden era of imperial piracy. Trump’s autarkic localisation policies will impoverish both America and the rest of the world.
Adam Smith spotted the problem in 1776. Perhaps someone should send Comrade Trump a copy of An Inquiry into the Nature and Causes of the Wealth of Nations.
* Senator Reed Smoot of Utah and Representative Willis C. Hawley of Oregon were the chief sponsors of the Smoot-Hawley Tariff Act of 1930.
