The economic costs of Trump’s tariff policy
President-elect Trump’s proposed tariff increases may yield short-term gains but will also harm consumers and industries in the long term.
In a nutshell
- Tariffs raise consumer prices, harming the economy and job market
- Short-term job creation in protected sectors can cause job losses elsewhere
- Non-economic reasons for tariffs do not lessen their economic drawbacks
In 2018, during his first term in office, Donald Trump implemented the “America First” agenda, introducing new tariffs on various imports. These tariffs hit solar panels and washing machines with rates of 30-50 percent, while steel was taxed at 25 percent and aluminum at 10 percent. The tariffs extended beyond China, affecting imports from various countries. With President-elect Trump set to return to the presidency, many expect further tariff increases, potentially as soon as he takes office. Tariff advocates argue that these measures align with the “Make America Great Again” vision, purportedly bringing jobs back to the United States.
Mr. Trump intends to impose 60 percent tariffs on imports from China and 10-25 percent tariffs on goods from countries like Mexico and Canada, among other measures, claiming that these actions can generate additional factory jobs, reduce the federal deficit and decrease prices for American-made products by increasing the cost of foreign goods.
Yet, his arguments for raising tariffs contradict the prevailing economic consensus. Expert analysis consistently shows how tariffs harm trade partners and negatively affect the U.S. economy, including the American workforce.
The economic costs of tariffs on consumer goods
Imports occur when the U.S. economy cannot produce enough goods at internationally competitive prices to meet domestic demand. They allow consumers to bridge supply gaps without driving up prices. Additionally, competition from international producers keeps domestic prices in check, safeguarding consumer purchasing power. Imports enable a greater supply of goods than an isolated economy could provide, ultimately boosting consumer welfare.
The implementation of tariffs disrupts this balance, leading to several predictable consequences. Tariffs increase the prices of protected goods, directly affecting consumers. This price hike reduces consumption, which harms consumer welfare. Those who continue to purchase tariffed goods pay a premium, forcing them to cut back on spending on other items. As a result, opportunities for mutually beneficial trades are missed, shrinking the overall economy.
Tariffs affect production as well. Domestic producers can charge higher prices without incurring tariff costs, enabling increased production and expanding employment in the protected industry. This phenomenon underpins the “bring jobs back to America” narrative. However, this is problematic, both because the increased production is unsustainable without tariff protection, and because new jobs created in one sector often come at the expense of jobs in other sectors of the economy. In effect, there is no net “return” of jobs from overseas; instead, they destroy efficient jobs to create inefficient ones.
The costs of tariffs are not merely theoretical. For instance, President Trump’s 2018 tariffs led to a 12 percent increase in the prices of washing machines and dryers. This rise in appliance costs reduced disposable income for other expenditures, triggering job losses in other industries. While the tariffs are estimated to have created 1,800 new jobs, the annual total economic cost per job to consumers was an estimated $817,000 – a starkly inefficient outcome mirrored in other tariff-protected sectors.
Tariffs impose significant financial burdens on consumers, making them pay more for the same – sometimes even inferior – goods. They also divert resources from efficient industries to inefficient ones, leading to overproduction at costs that exceed international standards.
Facts & figures
How consumers are affected by tariffs
The economic costs of tariffs on intermediate goods
Tariffs also affect intermediate goods, such as steel and aluminum, with unintended consequences for export industries. Rather than creating jobs, such tariffs can destroy them.
Consider the case of the Minneapolis Speaker Company (MISCO), which uses imported materials to manufacture custom speakers for industries ranging from aviation to medical devices. When President Trump implemented the tariffs in 2018, MISCO’s production costs rose by 25 percent. This rise made it harder for the company to compete with international producers unaffected by U.S. tariffs. Since a company like MISCO depends heavily on inputs not sourced in the U.S., it traditionally benefited from purchasing these materials at competitive prices. Tariffs change this.
Dan Digre, MISCO’s owner, noted that “a lot of our new products are just being built in China. No American labor, no American factory.” Because of tariffs, MISCO is at a disadvantage in competing with Chinese or other speaker manufacturers unaffected by Mr. Trump’s tariffs.
The example of MISCO illustrates how tariffs can incentivize companies to relocate their manufacturing operations abroad. While intended to protect domestic industries and jobs, tariffs can have the opposite effect, displacing jobs from the U.S. economy. In President Trump’s own terms, tariffs can inadvertently “move jobs away from America.”
The persistence and popularity of tariffs
If economists broadly agree on the detrimental effects of tariffs, why do policymakers support them? Two important factors contribute to this disconnect:
Concentrated benefits versus dispersed costs
Tariffs benefit specific industries by allowing producers to charge higher prices without incurring the tariff themselves. The benefits of this arrangement are clear, often seen in the form of job creation within these protected industries, which policymakers highlight as successes. Conversely, the costs are dispersed across the economy, affecting consumers in small increments. The widespread but minimal individual impact makes these costs less apparent and more difficult to identify statistically.
Asymmetric lobbying incentives
Industries that gain from tariffs have strong incentives to lobby in their favor, as the benefits are significant and concentrated. In contrast, consumers who bear the costs lack similar motivation to organize against tariffs. The small per capita burden – such as the 12 percent increase in washing machine prices – fails to mobilize opposition, even as domestic producers reap substantial gains.
This asymmetry in visibility and incentives perpetuates a narrative that tariffs benefit the economy at no cost, despite evidence and economists’ consensus to the contrary.
Facts & figures
The effect of Trump’s tariff and tax plans on U.S. GDP and inflation in the next one year
Non-economic reasons for tariffs
Beyond economic arguments, political or strategic motivations might justify tariffs. A nation may decide to produce a minimum quantity of certain goods domestically, such as those vital for national defense, to reduce dependence on potential adversaries. For instance, a country might want to avoid relying on energy supplies from a hostile nation for similar purposes.
In Mr. Trump’s case, tariffs also serve as a geopolitical stick. His administration uses tariff threats against Mexico, Canada and other countries to pressure them into assisting with U.S. domestic issues like drug smuggling and illegal immigration from Mexico.
It is important to recognize, however, that non-economic rationales for supporting tariffs do not erase the economic costs of tariffs. Whether the justification is economic or geopolitical, the inefficiencies and welfare losses remain. Regardless of the underlying rationale for Mr. Trump’s tariffs, their implementation will prove costly for the U.S. economy and workers.
While tariffs may appear to offer short-term benefits for specific industries, their net economic impact is negative. They burden consumers with higher prices, disrupt efficient production and, paradoxically, can even harm the industries they intend to protect. Despite these drawbacks, the concentrated benefits and dispersed costs create a political environment that continues to support tariff policies.
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As the U.S. moves forward with anticipated increases in tariffs under the Trump administration, it is essential to recognize the significant economic costs associated with these measures. There is often a trade-off between short-term political gains against long-term economic welfare. Protectionist measures can ultimately undermine the nation’s broader economic interests.
Scenarios
Very likely: Tariffs increase
The Trump administration will likely follow through on its tariff threats to maintain credibility in future negotiations. The rhetoric of “bring jobs back to America” has already garnered voter support for such measures.
Raising tariffs would cost the U.S. economy and its trade partners. Given the crucial role of the American economy in the international market, a new tariff hike would generate economic costs worldwide. A more concerning scenario would involve a trade war in which major trade partners retaliate against the U.S. with their own tariff hikes.
Mexican President Claudia Sheinbaum stated in a letter to Mr. Trump, “One tariff will follow another in response and so on, until we put our common businesses at risk," adding that tariffs would lead to inflation and job losses in both countries. Canadian Prime Minister Justin Trudeau also indicated he would retaliate, making life more expensive for Americans.
Unlikely: Tariffs remain the same
Maintaining current tariffs would require either a dramatic shift in President-elect Trump’s political stance or rapid concessions from foreign governments, both of which are improbable, especially in the short term.
The U.S. and the rest of the world will not face new economic costs, but the burden of the current tariff hikes will persist. The significant risk of this scenario is establishing current tariffs as a stable status quo, losing momentum to reduce them and recover gains from trade.
Very unlikely: Tariffs are reduced
Reducing tariffs to enhance U.S. competitiveness and foster international trade would undermine Mr. Trump’s global credibility and alienate domestic supporters, making this outcome highly unlikely.
A reduction in tariffs, however, would benefit all parties involved, as it would deepen the international division of labor. More trade integration also means more social interaction between individuals from different countries, contributing to a more cohesive and closer relationship between nations and minimizing the social fracture between nationals and immigrants.
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