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[classhandicapper]

The more I think about tariffs, the more I realize I was just as wrong about that as I was about free trade 30 years ago.

Let's assume a country raises tariffs on a bunch of foreign goods and generates 50 billion of tax revenue for the government.

How will those foreign companies respond?

1. raise prices to recover the cost of the tariffs
2. operate with lower profit margins

The argument is that generally the consumer will have to pay higher prices!

That's probably true.

They may have to pay up to 50 billion more for goods.

But what if the country also gives them a tax break equal to or greater than the 50 billion cost of the tariffs?

Then both the government and consumers are even! Government raises 50B from foreign companies and then gives it back to US consumers and business which they can use to pay the higher prices.

But there's more to the story. If foreign companies raise prices to make up the cost of the tariffs, they will probably lose at least some market share to US companies over time because of the higher prices they are charging or eventually decide to move to the US to avoid the tariffs (and employ US workers). Either way we win.

The key is that if you raise tariffs, you have to lower other taxes to offset the higher prices on imported goods. Then the country wins.

Trump lowered other taxes. So whatever tariffs he's raising will simply be offset by the tax cuts and still leave consumers in good shape. However, the US position has improved long term because US companies are going to be competing with foreign companies whose prices are now higher.

The worst case scenario is a short term disruption as US companies gear up to steal market share.

I'm at the point where I'm pretty sure he should stop using tariffs to push for better trade deals. He should slowly impose higher tariffs to raise cash for government and then put that revenue back in the pockets of US consumers and businesses with lower taxes, steal market share, and let foreigners pay for our government instead all our tax revenue paying interest on the bonds they accumulate because of our trade deficits. He'll only be able to take it so far before they bail, but he should take it where it can go.