Trump's tariff threats amount to a game of chicken with trading partners

Former president Donald Trump’s vow to place tariffs of 10 to 20 percent on most US imports and 60 percent on imports from China will be costly to American households, as studies by the Peterson Institute for International Economics and others have found. But the analysis leaves out the cost of what is certain to be retaliation by US trading partners.

In effect, if elected, Trump would be playing a game of chicken with all the countries of the world. The expression “game of chicken," dating back to the 1950s and 1960s, refers to two automobile drivers driving toward each other at high speeds, to see who will turn “chicken” and swerve away first.

Trump seems to be betting that his aggressive tariffs will prompt allies to swerve away rather than retaliate. But history discredits that assumption. As it happens, the likely damage reflects another use of the 1960s-era metaphor, derived from what was actually known as a “Chicken War” in the annals of trade disputes.

In December 1963, President Lyndon B. Johnson announced that the United States would impose high tariffs on four products imported from Europe in response to the European Common Market dramatically restricting exports of American chicken in what came to be known as the “Chicken War.” It sounds quaint to talk of a dust-up over poultry between the United States and the then relatively new European Common Market, but it was front page news in its day, just as Trump’s tariff policies are today.

The United States had the right to retaliate against its European trading partners for the loss of its poultry export market. It imposed tariffs that would hurt, on products of export interest to Europe: brandy, starch, dextrin, and especially light trucks, hitting Volkswagen with a 25 percent tariff. Tariffs being easier to put on than to take off, the 25 percent duty on light trucks persists to this day.

Why would the Trump-promised tariffs be a game of chicken? When president, Trump placed higher tariffs on imports of steel and aluminum, the European Union and Canada promptly retaliated with increased tariffs on US exports. Neither side “swerved.” (The European retaliatory tariffs are currently suspended until March 31, 2025, replaced temporarily by less restrictive quotas.)

When Trump placed additional tariffs on Chinese imports, China retaliated, and the US government spent well over $20 billion on subsidies to its farmers to offset the loss of their market in China. And as with the light truck tariff, America’s China market, gained with great effort over many years, never recovered.

The Peterson Institute has estimated that the 10 to 20 percent across-the-board tariffs combined with a 60 percent tariff on China proposed by Trump would cost US families $1,700 or $2,600 extra a year to cover their basic needs, depending on the height of the Trump tariff. But this estimate is very conservative. It does not take into account the fact that domestic producers will likely raise their prices if a US global tariff takes effect, and it does not take into account other costs to American wage earners when foreign retaliation results in the loss of higher-paying jobs producing goods and services to sell abroad. These consequential effects substantially increase the costs to the US economy.

The Trump China tariffs did get promises from China in 2020 to increase purchases of certain US goods and services by $200 billion for the two-year period from January 1, 2020, through December 31, 2021, above 2017 baseline levels. There was one problem. China in the end purchased none of the additional US goods and services it had committed to. Obtaining a pledge from a counterpart in a negotiation that cannot be fulfilled gets good initial press but is not a winning strategy.

Some apologists for a new Trump tariff wall theorize that it will only be temporary, used as leverage to get other countries to unilaterally remove their tariffs. Two problems undercut that argument. First, instead of submitting to US demands, US trading partners would more likely impose higher tariffs on US goods, either as retaliation or in emulation of US protectionism, or both.

Second, Trump has suggested using the tariff to fund the government instead of relying on income taxes to pay for programs. For example, he told the Economic Club of New York on September 5 that he would fund child care from his tariff. The need for child care is not transitory; it is permanent, as is generally the government’s need for revenue. In addition, Trump has said he would be looking for a way to pay for extension of his 2018 tax cuts. Tariffs once in place would be very hard to remove, and the US economy would pay a price for imposing them for years to come. Bargaining with tariffs does not lead to better outcomes but rather results in permanent damage. 

There is no upside to a game of chicken in American international economic policy. It would be irresponsible and counterproductive.