A 25% Sales Tax on Imported Autos Can Only Negatively Impact Economic Growth
Tariffs are taxes and all taxes negatively impact economic growth.
Trump’s view is that a punitive 25% tax on foreign auto manufacturers will force those OEMs and parts manufacturers to build factories here in the U.S. to avoid the 25% tax.
Allow me to demonstrate how that thinking is incorrect. Let us assume that tomorrow (April 2nd is actually Trump’s deadline), every foreign Auto OEM has magically built auto production capacity here in the U.S. Those factories are built at great cost. Guess who will pay for those factories? If you guessed the U.S. consumer, you are correct. Sure, OEMs may fund capital expenditures in part from balance sheet cash, cash from operations and capital raises, but I promise you, higher automobile prices will fund much of OEM capital investments.
The U.S. Consumer has been slowly rolling over since 2022 (just look a Bank of America’s Consumer business, NCOs in particular).
Fiscally liberal polices such as Tariffs, high income taxes, and deficit spending can only devalue the Dollar and further punish the Consumer.
Trump mailing $5,000 checks to Americans will further devalue the Dollar (making all automobiles more expensive), and engender moral hazard.
Fed Chair Powell will exercise yield curve control to corral the stubborn 10-Year Treasury Yield (still further devaluing the Dollar).
Milton Friedman should be required reading for all members of Congress, Presidential candidates, Federal Reserve Board members and Treasury Secretaries. One of Friedman’s best quotes about tariffs: “Tariffs do protect. They protect Consumers from low prices”.
Prices are going in only one direction - higher. Economic growth (measured in real terms), will only go lower.