What Tariffs Could Spell for the U.S. Economy

During the recent political campaign, President-elect Donald Trump discussed putting tariffs on many of the United States' major trading partners, as close in proximity as Mexico and Canada and as far-reaching as China and Europe. The effectiveness of tariffs is hotly debated, while some of its impacts are clear and obvious. What are those impacts?

Government Revenue and Prices

A tariff is a form of taxation on importing goods from another country. For half of the history of the United States, tariffs were the primary revenue for the federal government. This is no longer the case. In fact, according to the US Council of Economic Advisers, tariffs made up only 2% of total revenue in 2023.

Tariffs result in an increase in the cost of foreign goods. Higher foreign prices allow domestic companies to produce the same goods and become more competitive. If they are now the lowest-cost producer, they can increase their revenues by selling more goods and increasing their prices just enough to maintain their low-cost standing and maximize revenue.

The result is a higher cost to the consumer and higher profits to domestic companies. The government receives increased revenue from tariffs only if the foreign goods are still the lowest-priced option.

Trade Wars and Market Distortions

In a world of globalization and economic connectivity, changes to that connectivity can have many rippling effects. Tariffs are not just a tool to increase government revenue but also a tool against foreign governments and companies. This can include but is not limited to an economic penalty, the protection of domestic production, and the balance of exports compared to imports.

The effectiveness of tariffs at achieving these goals is contentious mainly because the effects of tariffs in this manner cannot be perfectly controlled. Tariffs almost certainly hurt the foreign country targeted economically, protect domestic companies from foreign competition, and reduce imports.

Tariffs very rarely are a one-way street. Tariffs in one direction are often met with retaliatory tariffs from the other nation. This can lead to a trade war with ever-increasing tariffs on each country. This makes goods more expensive in both countries, with companies in both countries, on average, also losing money from increased costs and fewer exports.

An often-overlooked consideration is that domestic production rarely relies solely on domestic goods. Protecting one industry can hurt other industries even if no retaliation tariffs are implemented.

Examples

As mentioned earlier, tariffs are nothing new and have been used extensively throughout history with mixed efficacy. The Smoot-Hawley Tariff Act of 1930 did what? Anyone? Anyone? It imposed an increase of 20% on all foreign agricultural goods to protect struggling farmers during the Great Depression.

This, along with retaliatory tariffs from 25 other countries, largely in Europe, led to a decrease of 66% of all global trade, according to Britannica. This did not just hurt the economy of the US but was specifically detrimental to the farmers it was supposed to protect.

The Chicken Tax was a 1961 tariff by France and Western Germany on chicken that resulted in a loss of 25% of US chicken exports to Europe. The US, as a result, put a 25% tariff on foreign light trucks, most notably giving rise to American trucks. As a result, German, Japanese, and other nations' light trucks are sold far less frequently in the US to this day.

In 2009, President Obama imposed a tariff on Chinese tires as punishment for Chinese policies and to save jobs in the industry. According to the Peterson Institute of International Economics, this saved 1,200 jobs in the tire industry from being lost. The cost of this policy to the US taxpayer was $1.1 billion, in addition to $1 billion from China's retaliatory fees on US chicken.

Conclusion

Tariffs have a broad yet deep impact on the world's economies, even if they are not directly targeted. With President-elect Trump promising to pass wide-ranging tariffs on many countries, it is important to understand what that could mean for you.

Trump's proposed tariffs will likely achieve part of his goal of lessening the gap between imports and exports, namely in China. It will likely prevent jobs from leaving and going to the countries that receive a tariff.

The pressure of the tariffs could also cause countries to negotiate to ensure they do not take effect, like combating Fentanyl production and importation to the US. This will come at a cost, especially at the scale Trump proposed. In all my examples only one industry was targeted yet had substantial results.

If multiple countries, especially our major trading partners, are subject to tariffs in all sectors, we should expect major cost increases, especially for products that are primarily from other countries or require other countries for materials.

With globalization ever increasing, it is not unreasonable to expect major price increases if all of Trump's mentioned tariffs are enacted.

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