Former White House economist Gary Cohn expressed concerns yesterday that Trump’s tariffs would erode the benefits from tax reform. Since the on-again-off-again 25 percent tariffs on imports from China are—as of 3:23pm, Friday, June 15, 2018—“on again,” let me share this back-of-the-envelope analysis that shows why Cohn’s concerns are justified.

The Numbers Don't Look Good

Certainly, the additional profits expected from the reduction in corporate rates from 35 to 21 percent could be entirely wiped out for the manufacturing sector. In 2017, according to Census Bureau data, the pre-tax profits of the U.S. manufacturing sector were $691 billion. At 35 percent, the taxes on paper would be $242 billion. At 21 percent, the average tax bill is $145 billion. So, roughly speaking, the reduction in rates is estimated to be worth about $97 billion in terms of 2017 profits.

The combined effect of the increased costs and reduced revenues comes to a $241 billion reduction in profits.

Well, in 2017, the value of U.S. goods imports was $2.33 trillion. Commerce Department data show that half of that value was comprised of intermediate goods (raw materials, production inputs, capital equipment)—the purchases of producers, not households. In other words, approximately $1.17 trillion of imports are U.S. costs of production.

If a tariff of, say, 10 percent were imposed on these imports, the cost of production for manufacturers would rise, roughly speaking, by $117 billion. That’s a $117 billion reduction in profits. Meanwhile, assuming foreign governments responded in kind and hit U.S. exports with 10 percent tariffs, manufacturing revenues also would take a hit. U.S. exports of manufactured goods in 2017 amounted to $1.24 trillion. Again, roughly speaking, that 10 percent tariff would reduce U.S. manufacturing revenues by $124 billion. That, too, reduces profits.

The combined effect of the increased costs and reduced revenues comes to a $241 billion reduction in profits (a 35 percent reduction in manufacturing’s 2017 pre-tax profits). So, ceteris paribus, a 10 percent across-the-board tariff would reduce the U.S. manufacturing sector’s profits by about 35 percent. With that kind of “downturn” in profitability, from where would the resources come to make capital investments, build new production facilities and R&D centers, and to offer new employment opportunities?

What It Means in the Real World

Let’s apply this ballpark estimate to the actual situation on the ground. The tariffs Trump has already imposed or announced (steel and China tech products—leaving out aluminum, washers, and solar panels) subject $100 billion of imports to tariffs of 25 percent. The retaliation so far announced (by China, Canada, Mexico, and the EU) is commensurate—it will be approximately 25 percent on $100 billion of U.S. exports. So, at the moment, $200 billion of U.S. trade is in the crosshairs.

We could be up to $800 billion of U.S. trade by year’s end. That’s 20 percent of all U.S. goods trade, by the way.

But a new Trump investigation into the national security implications of auto and auto parts imports could add another $600 billion of trade to the mix—$300 billion of imports hit with 25 percent duties and $300 billion of retaliation. The president wants to get the investigation completed before the election in November, so we could be up to $800 billion of U.S. trade by year’s end. (That’s 20 percent of all U.S. goods trade, by the way.)

So, 25 percent duties assessed on $800 billion of trade, approximately half of which would be U.S. manufacturing inputs and U.S.-manufactured exports comes out to a combined $100 billion hit on the sector’s profits (25 percent of $400 billion). That eclipses the $97 billion gain from the corporate rate reduction.

While this is all bad news for the economy, I wonder whether the tax-reform advocates who held their noses and excused Trump’s trade transgressions because tax reform would make everything right will start to speak out. Paging Larry Kudlow, Steve Moore, and Art Laffer.

Reprinted from Cato at Liberty.