“The nicest word in the dictionary is tariff,” former President Donald Trump told the Economic Club of Chicago last week. “That’s my favorite word.”
The Republican presidential candidate has spent the past few weeks proposing higher tariffs on foreign goods entering the United States. He called for a blanket duty of 20% on all imports at least 60% About Chinese products, 100% rates countries moving away from dollar trade and a 2000% tariff On cars made in Mexico.
Economists throughout the political spectrum he opposes these ideas by saying the most likely outcome would be higher prices for consumers. Here’s a look at how tariffs work and why they’re so critical in an election where the cost of living is front and center.
What tariffs do and who pays them
Tariffs, also known as fees or charges, are a deterrent. They penalize domestic firms that import foreign-made goods to encourage companies to source more domestically. When a tariff is imposed on a product—whether it’s a watermelon, a washing machine, or a high-tech component—any U.S.-based company that imports it must pay a percentage of the product’s price to the government, and federal officials set the rate. .
Trump said that the income from these payments will be huge. He proposes using it to fund everything from tax cuts to subsidized child care. In crazy answer Asked about the latter issue last month, he said that “those numbers” from tariff revenue “are much bigger than the numbers we’re talking about, including childcare”.
But any business facing a tariff has two choices: either stop importing the targeted product and buy it domestically instead, or raise the selling price. When firms cannot find the goods they need within US borders at prices they can afford, or at all, they tend to pass on some or all of the cost of the tariff to consumers.
That’s why we have Vice President Kamala Harris He called Trump’s tariff proposals A “sales tax for the American people,” which he said would raise costs for households by $4,000 each year. Adam Hersh, chief economist at EPI Action, the advocacy arm of the left-leaning Economic Policy Institute, puts the estimate lower, but still in the four-figure range, at $2,500 to $3,000 a year.
“Donald Trump won’t just impose a $4,000-a-year tax increase on the middle class — his plan will permanently raise inflation, crowd out American manufacturing jobs and hurt manufacturing workers more than any other sector,” said Harris campaign spokesman Joseph Costello. statement. “Independent economists have repeatedly warned about the economic dangers of Trump’s plan, and Americans should take note.”
The Trump campaign did not respond to a request for comment.
Whatever the final cost, many economists agree that higher, more widespread tariffs will raise prices for consumers.
“He’s right that his tariffs are like a sales tax in the sense that consumers everywhere will pay,” Alan Deardorff, an economist specializing in international trade at the University of Michigan, said of Harris’ claim. But he cautioned that only fully imported products are likely to rise at the same rate as the tariff itself; costs of goods assembled in the US from a mix of imported and domestic parts, such as cars and airplanes, are likely to increase less.
Although tariffs are widely frowned upon by economists, they now have more bipartisan support than they have in decades. There is agreement on both sides that indefinitely lowering barriers to global trade has harmful economic and social consequences.
Some of them farmers and factory owners Under the Trump administration, they complained that tariffs hurt their bottom lines, prompting the White House to send tens of billions of dollars in subsidies to agricultural producers. But the Biden-Harris administration has not changed course. It increased and even added to its predecessor’s tariffs on Chinese goods by about $300 billion additional rates on $18 million worth of Chinese goods in strategic industries including electric vehicles, semiconductors, steel and aluminum.
Impact on prices and jobs
Trump and his pro-trade allies argue that the tariffs protect and strengthen domestic markets, encouraging domestic producers to expand. They are also seen as an economic weapon. Trump recently The Illinois-based tractor maker has threatened John Deere with a 200% tariff if it moves production to Mexico.
Some economists have long theorized that if the U.S. imposes tariffs on a product, foreign producers will lower their prices to avoid being squeezed out of the large, lucrative American market. Tariffs had been falling around the world for decades before the Trump administration imposed the tariffs it imposed in 2018. natural experiment to test that thesis.
In the years since, Deardorff said, “you won’t find anything in the data that shows that foreign prices have fallen.”
Consumer prices will always rise with any reasonable analysis of tariffs.
Monica Morlacco, University of Southern California
Even if the tariffs force some overseas producers to lower prices, U.S. consumers won’t necessarily benefit, said Monica Morlacco, an economics professor at the University of Southern California. At best, the price would just drop by less than the amount of the tariff.
“Consumer prices will always rise with a reasonable analysis of tariffs,” he said.
In fact, some of Trump’s earlier tariffs have forced domestic producers to raise prices. In 2018, Trump imposed tariffs ranging from 20% to 50% on many domestic washing machines from South Korea, undercutting Seoul-based LG. raised prices in response. But as the new, more expensive foreign models boosted demand for US-made products, so did the brand’s American competitors.
University of Chicago researchers who reviewed the price data later found “There is no clear difference between domestic and foreign brands in these results, all in the range of 5 and 17 percent” – price increases were also observed for dryers, which are not subject to tariffs but are often purchased with washers.
The following year, a paper from the New York Federal Reserve found Trump’s tariffs and other protectionist trade policies. It cost US consumers $1.4 billion every month. “Tariffs were almost entirely passed on to US domestic prices, and thus the entire incidence of tariffs fell on domestic consumers,” the authors write.
Prices aside, “people believe that tariffs will protect local jobs and they like the idea that we can help American workers,” said Robert Lawrence, professor of international trade and investment and senior fellow at the Peterson Institute for International Economics. . “I think they’re wrong.”
That’s partly because the tariffs will reverberate through global trade, he said: “We will buy less from foreigners because their goods are more expensive. Therefore, we will show these negative effects on our income and therefore we will be able to sell less abroad.
However, voters have mixed opinions about the tariffs. Moment NBC News survey Just over a third of voters this month said they were in favor of universal fares, while most others were against or indifferent, but Reuters/Ipsos poll found a narrow majority in mid-September supporting Trump’s tariff plans.
When people think about tariffs, they think about bringing back jobs or opening factories, says Maurice Obstfeld, senior fellow at the Peterson Institute.
“These are laudable social goals,” he said. “But what the public is less aware of about tariffs is that they raise prices for consumers and also businesses that use protected access. They are not really effective in bringing jobs back on a large scale.”
A nonpartisan Tax Foundation that typically advocates low taxes and other business-oriented policies is estimated It said Trump’s latest tariff plans would reduce US gross domestic product by 0.8% and cost 684,000 jobs. Economists say that when jobs are created, they often cost more than the job pays. In a University of Chicago washing machine study, researchers calculated that each job created costs consumers about $815,000 a year.
However, Obstfeld acknowledged the political appeal of tariffs in many regions struggling with manufacturing job losses. It’s easy for economists to say that uncompetitive industries should go out of business, but “we’re talking about real people with real jobs,” he said.
“That’s one of the reasons why defense is so popular,” Obstfeld said. “Because otherwise, a lot of people are hung out to dry.”