Chinese Tariff Rebate Plan: How We Can Win the US-China Trade War

Everyone is aware that President Trump is using tariffs to confront China over its myriad illegal and highly questionable trade practices.  When he meets China’s leader Xi Jin-ping in Osaka tomorrow, President Trump should let him know that we can win this trade war without doing harm to our own citizens and our economy

The 25% tariff on $200 billion of Chinese goods can raise $50 billion in taxes.  And if the planned tariff on an additional $300 billion of Chinese products happens that can add as much as  another $75 billion of taxes.  Potentially $125 billion annually of new taxes, on the admittedly unrealistic assumption that trade volume remains unchanged.

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Most critics of tariffs argue that tariffs are ultimately passed on to the end buyers, so they are really being paid by the American consumer. 

A first analysis of the current 25% tariffs on the $200 billion of Chinese goods by Oxford Economics suggests that they may end up costing the average US household about $500 per year; and over $800 per year according to the Federal Reserve Bank of New York. 

Is it any wonder then that many economists are predicting a significant reduction in economic growth, or even a recession, as a result?

Can President Trump’s tariff on Chinese goods defy this history and accomplish their objectives without harming our economy and citizens? 

The answer is yes.  Primarily because a tariff is a voluntary tax.  The consumer will pay this tariff only if they insist on continuing to purchase Chinese goods. 

Reduction in purchasing Chinese goods by the American consumer is already underway, applying downward pressure on the Chinese economy.  The economic growth rate for all of 2018 shows the slowest pace since 1990; and the 2019 Q1 rate was the lowest since 2016 trading economics.

However, this also is putting pressure on the U.S. economy.  And that is troubling. 

There are two perils to the overall economy when punitive tariffs such as these are imposed.

The first peril is that of inflation.  Everything imported from China will experience higher prices, from shoes to toys to iPhones.  Currently, however, the prices Americans are paying have not budged much.  It seems China has been subsidizing exporters and devaluing its currency.  Further, U.S. businesses have been avoiding passing on higher prices. 

But the longer this trade war goes on inflationary pressures will rise.  U.S. manufacturers and importers from other countries not subject to the tariff will have the ability to raise their prices without price competition from cheaper Chinese products.  Higher prices, like a virus, will spread throughout an economy; and, left unaddressed, can lead to the return of out-of-control inflation.

Inflationary pressures can be alleviated by replacing Chinese products from other sources not subject to tariffs.  In other words, by shifting the supply chain. But this is not easy; and it does take time.  However, depending on the product, there are some signs this is already happening.  And this has to be frightening to the Chinese.

The second peril is that of crushing our current economic vibrancy.  

The U.S. economy grew substantially under presidents Coolidge, Kennedy, Reagan, and now Trump.  All four presidents reduced taxes (and regulations), and in doing so increased overall business activity. 

A tariff (or any tax) does the exact opposite.  It pulls funds out of Americans’ hands and into the government’s coffers.   Consumers spend primarily on necessities.  Less demand for other goods means less business income and a reduction in employment. 

So, the more immediate issue appears to that of the American consumer experiencing a reduction in available dollars to spend.  The solution to this issue is actually quite simple. 

For now, let’s call it the Chinese Tariff Rebate Plan.  This would call for an annual tax rebate for every household when they file their tax return to compensate for higher prices as a result of the tariff. 

Where would this money come from?  After all the last thing we want to do is drive up the annual deficit.

It would come from the Chinese, out of the $50 to $125 billion the Chinese would be paying into the Treasury when their goods enter U.S. ports. 

The size of the tax rebate would be calculated annually by the amount of tariff deposits paid into the Treasury that year, less President Trump’s subsides to American farmers, and less any administrative costs (which should be minimal since the IRS can easily include this on Form 1040), divided evenly across all American households (about 110 million).  In other words, this would not cost the U.S. government a penny. 

The Chinese Tariff Rebate Plan could be a political winner for the Trump administration.

First, the rebate could replace those funds siphoned from the economy as a result of the trade war, and this infusion will undoubtedly re-stimulate the U.S. economy. 

Second, by making this a refundable tax rebate payable upon filing 2019 tax returns, starting in January of 2020 the stimulus to the economy would be highly impactful just before the 2020 election in November. 

Would the Democrats oppose the Chinese Tariff Rebate?  Opposition to the tax rebate would expose just how much the two parties have shifted focus.  Once the champion of the poor and working classes, the Democrats would be standing in the way of a substantial tax rebate targeted to help these very same groups.

Best of all, the Chinese Tariff Rebate would also be sending a strong message to China.  If the Chinese think that they can wait out President Trump until our economy suffers and Americans demand an end to this trade war, they are wrong. 

The tax rebate would allow the U.S. economy to better weather the tariffs and retaliatory tariffs.

This plan also gives businesses the time needed to shift their supply chains to other low-cost manufacturing economies. 

And most important, this has to be causing sleepless nights all over Beijing.  Because the shift in our supply chain to other countries is the biggest threat to long-term Chinese economic growth.

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