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The Economic Consequences of Trump's Tariff Policy: Effects and Implication

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By Arun Dahal Khatri

Among all instruments existing within the U.S. trade policy toolbox, a tariff has invariably remained among the most contentious. Generally, these have been used to help improve the balance of trade protectionism. During his previous presidency, Donald Trump adopted tariffs as one of his essential toolsets. More recently, in the case of his second term, proposals promise even more aggressive measures: a tariff of 20% on all imports, a tariff of 60% on Chinese goods, and increased tariffs on imports from both Canada and Mexico. Although prima facie, these tariffs are targeted to help prop American manufacturing and decrease dependency on foreign products, studies have shown historical precedent that they have a very far-reaching, predominantly negative effect on the U.S. economy. This article considers what such policies mean for economic growth, jobs, trade relations, and family welfare in light of recent research and historical data.

Some of the direct effects of tariffs relate to their impacts on economic output. To some extent, tariffs raise the price of imports, which may boost the prices of goods and services hence, being passed onto consumers and businesses frequently reduces purchasing power and investment. A universal 20 percent tariff combined with a 60 percent tariff on goods from China would reduce the U.S.'s long run. Whereas GDP would be reduced by 1.3%, on the other hand, a more surgical version from the Tax Foundation's General Equilibrium Model slashes GDP by 0.4% with the imposition of tariffs at 25% on imports from Canada and Mexico and a 10% tariff on importation from China. Such wide-ranging estimates are due to the economic cost of the tariffs - a tax levied on trade and consumption. It will dampen consumer spending, one of the major drivers of the U.S. economy, and prices will go up, further depressing economic growth.

Another significant impact of the tariff could be on employment. Said to protect U.S. jobs, the reasoning is overly simplistic. It is in consideration of this fact that research studies by institutions like the National Bureau of Economic Research have found that the losses in the industries' jobs dependent on the imported inputs often more than offset the gains in the protected sectors. Kadee Russ and Lydia Cox expressed, "During the presidency of Trump, the tariffs on the steel raised costs for the consuming industries, which outnumber the jobs producing at the ratio of 80 to one." The Tax Foundation estimated that losses in full-time equivalent employment from the proposed tariff scenarios could range from 344,000 to 1.1 million. These losses are further magnified by retaliatory tariffs set by other countries that make U.S. exports less competitive in foreign markets.

Another highly sensitive area is the welfare of households. In effect, the tariff is a tax on consumers since it raises the price of imports and cuts their choices. In fact, tariffs imposed in this trade war have already elevated annual U.S. household tax burdens by an average of US$200 to US$300, with estimates running as high as US$625 when accounting for the behavioral effects. These are broader economic costs from the tariffs regarding lower incomes, lost output, and reduced consumer choice. All this may portend for most poor and middle-income households is the added financial burden this imposes due to the greater devotion of more budgets toward purchasing essential commodities because of such tariffs. Besides the impact on national boundary lines, there are much more profound impacts. Typically, it is where trading partners try to get one good shot of retaliation for their sake, which accounts for global growth damage and eventual trade wars. Examples include retaliatory products of U.S. actions under Sections 232 and 301, which have cut U.S. exports and contributed to the loss of agricultural and manufacturing jobs. It has, for example, been estimated that unexpected tariff shocks lower imports than exports, leading, at best, to marginal declines in trade deficits and huge costs on lost GDP. On the other hand, retaliatory tariffs make U.S. goods less competitive in foreign markets, further lowering export revenues while inflicting more damage on industries based on international trade.

However, the worst consequence of the tariffs is the longer-term implications for investment and innovation. In a position to raise the costs of imported inputs and components, the tariff policy raises production costs for American firms and reduces their competitiveness in domestic and global markets. In this regard, American businesses will invest less in new technologies and production methods, which is very important to the longer-run path of economic growth. For example, a recent estimate by Alberto Cavallo and co-authors in 2019 estimated that tariffs on Chinese imports are almost entirely passed through into U.S. import prices. Firms partly absorb some of these costs instead of passing them on to consumers.

That could dampen some price increases shortly and cut into businesses' profit margins, leaving little room for reinvesting in growth and innovation.

Tariffs have never reached their goals of protecting domestic industries and decreasing the trade deficit. Indeed, an analysis by economists at the Federal Reserve Bank of New York warned that tariffs imposed by President Trump would probably fail in their aim of narrowing the trade deficit since any declines in imports would be offset by reductions in exports. Indeed, data from the U.S. Proved by the Census Bureau amongst many, under the Trump Administration alone, despite the imposition of tariffs on hundreds of billion worth of imports, the trade deficit has leaped high enough to even prove that such tariff is not a practical solution to solve the differentials in savings and investment rates of the two countries.

The Biden administration left mainly in place tariffs imposed during the Trump administration and, by some measures, it expanded them: In May of 2024, it announced slapping new tariffs on $18 billion of Chinese goods - including semiconductors and electric vehicles. While such measures are believed to address issues like intellectual property theft and other unfair trade practices, they add to the overall cost factor created within an economy due to a trade war. The tariffs imposed by the Trump and Biden administrations have reaped over $233 billion in customs duties as of March 2024, paid out by households and businesses within the U.S. Indeed, various such studies have thrown out results on the debilitating effects of tariffs. For example, in 2019, Aaron Flaaen, Ali Hortacsu, and Felix Tintelnot estimated that tariffs increased consumer costs by more than $1.5 billion because manufacturers passed higher import duties on to buyers. Similarly, a 2018 study from the University of Chicago projected that tariffs on steel and aluminum would create U.S. welfare losses while not offering any appreciable economic benefit. Such findings are reiterative of a broad recognition among economists: Tariffs are costly, cumbersome policy tools.

Accordingly, the added tariffs that a second Trump administration proposed and those the Biden Administration has kept or expanded will bring great pain and cost to the U.S. economy. In fact, it is a well-documented fact that tariffs raise prices, cut output, reduce consumer choice, and impose significant costs on households and businesses. Tariffs undermine the pace of employment and investment, further slowing economic growth. Although these tariffs may save part of some industries for some time, in the longer term, it is a cost that is badly outweighed. A more deep-seated manner in which policymakers could contribute rather than tariffs would be alternative options like refining international trade agreements to handle trade imbalance and unfairness. Quite simply, tariff policies cannot work as inefficient and unsustainable long-term instruments of prosperity.

References :

Tax Foundation General Equilibrium Model, October 2024, January 2025.

Kadee Russ and Lydia Cox, 2018, "Economic Effects of Steel Tariffs."

National Bureau of Economic Research, 2019, "Trade War Tariffs and Import Prices."

Alberto Cavallo et al., 2019, "Tariff Pass-Through Effects."

International Monetary Fund, 2024, "Tariff Shocks and Economic Losses."