There is a renewed focus across the United States, China, the European Union (EU), Mexico, Canada, and much of the rest of the world on looming Trump tariffs.
Economists, businesses, and consumers globally are wondering what will happen when Donald Trump becomes the US president again in January 2024.
During his most recent election campaign – his second – Trump said he would impose higher import taxes to bolster domestic manufacturing, reduce reliance on foreign goods, and bring back jobs from abroad.
He proposed a 60% levy on Chinese imports, hefty taxes on goods from the EU, Mexico, and Canada, and even duties on all imports. In this context, the words levy, tax, and duty mean tariffs.
Trump, his fans, and many voters are hoping his policies will lead to a “manufacturing renaissance.” However, most economists warn of inflationary pressure, supply chain disruptions, and increased costs for US families.
What Are Tariffs and How Do They Work?
The quotation below comes from one of our previous articles titled “What Are Tariffs?”:
“Tariffs are customs duties or taxes imposed on goods that are imported. Their purpose is to either elevate the cost of these imported products to match or exceed local market prices, or to generate government revenue.”
“Tariffs along with quotas – limiting the quantity of imports coming into a country – are two weapons that countries use to both protect their domestic producers and improve their trade balance.”
“The strategic use of tariffs can serve to incentivize local production and foster the growth of nascent industries within a nation.”
Although the idea of tariffs is to encourage the sale of domestically produced goods or alternatives, the extra cost (taxes/tariffs) gets passed onto businesses and consumers, which leads to higher prices. In other words, tariffs may increase a country’s inflation rate.
In the short-term, tariffs may help boost domestic sales and even shift some manufacturing jobs back to the US. However, the economic repercussions are complex. There is a serious risk of higher inflation across the board, trade wars as other countries retaliate, and global supply chain disruptions.
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Global Supply Chain
Disruptions in the global supply chain can lead to delays in production, increased costs, inventory shortages, and significant challenges for businesses to meet consumer demand.
Such disruptions can also cause inflationary pressures due to higher transportation costs and a surge in demand for limited goods, affecting industries worldwide.
They can also lead to bankruptcies, particularly for small and medium-sized businesses or those heavily reliant on just-in-time (JIT) inventory systems.
The Immediate Impact on Businesses
American companies are already reacting to the possibility of higher tariffs. Many are stockpiling inventory to avoid future cost increases.
Walmart and Lowe’s, for example, have expressed concerns about rising prices, noting that a significant portion of their goods come from abroad.
Marlin Steel, a U.S. manufacturer, anticipates increased business if tariffs even the playing field with cheaper imports.
Conversely, companies like Target and Fastenal highlight the risks of overstocking, including higher warehousing costs and inefficiencies.
The impact on US businesses varies, depending on what you make or sell. If your company relies heavily on imported materials or goods, such as apparel (clothing) or electronics, you may end up having to choose between tighter profit margins or raising your prices.
What About Consumers?
Apart from some companies, consumers typically lose out when tariffs are imposed across the board. Most companies pass on these extra costs to their customers, which means higher prices at checkout.
If Trump introduced an across-the-board tariff of 20%, the effect on these goods would be as follows:
- Apparel: a $50 pair of shoes would increase to $60.00.
- Furniture: a $2,000 mattress would cost $2,400.00.
- Electronics: an $800 smartphone would increase to $960.00.
- Computers: a $1,000 laptop would cost $1,200.00.
- Electronics: a $600 television would rise to $720.00.
According to the Peterson Institute for International Economics (PIIE), the proposed tariffs could cost the average American household over $2,600 annually, potentially negating savings from other economic policies.
On November 12th, PIIE wrote the following about tariffs and American consumers:
“The American people have not been told that they will bear the cost of the tariff (in fact, they were told foreign exporters would pay it) nor that they should consume less.”
“The blanket tariff is a way to lower consumption without admitting that this is what is going to take place. No US administration has sought to impose a value added tax (a national sales tax) because of its domestic unpopularity.”
Broader Economic Implications
If tariffs push up inflation, it will complicate the Federal Reserve’s efforts to stabilize prices.
If history is anything to go by, events such as the Smoot-Hawley Tariff Act of 1930 demonstrate how protectionist policies can backfire, reducing economic activity and worsening recessions.
Moreover, as mentioned earlier, retaliatory tariffs from trading partners could harm American exporters, reducing global market access for U.S. goods and services.
If the tit-for-tat escalates into a trade war, it could slow global growth, disrupt supply chains, raise costs, and harm jobs and investments both abroad and in the United States.
Manufacturing and Jobs: A Mixed Outlook
While tariffs might protect certain US industries in the short term, the broader employment picture is less clear:
- Pro-tariff groups like the Coalition for a Prosperous America argue that higher tariffs could create millions of manufacturing jobs.
- However, studies from organizations like the Brookings Institution suggest that job gains in protected sectors are often offset by losses in industries reliant on imports.
Industries such as steel and apparel might see modest growth but at a significant cost to consumers and the broader economy.
Long-Term Challenges and Opportunities
Tariffs can be effective but policymakers must implement them carefully and target them strategically.
Broad, untargeted tariffs risk disrupting trade relationships and inflating costs unnecessarily.
Economists urge policymakers to focus on:
- Strengthening rules of origin in trade agreements to encourage domestic production.
- Finding ways to incentivize reshoring or near-shoring manufacturing through tax breaks and infrastructure investment.
- Collaborating with allies to address unfair trade practices without alienating key economic partners.
PIEE also wrote,
“It has been claimed that a blanket tariff will cause the shifting of production to domestic factories. It is not at all clear, however, that this works. US production of steel and aluminum did not increase because of the Trump tariffs of 25 and 10 percent, respectively.”
“Nor is it credible that goods that now are almost entirely sourced abroad, like shoes and clothing, will substantially return to being produced domestically.”
Conclusion
Trump says that his tariff proposals will help reshape global trade and revitalize American manufacturing, but their effectiveness remains uncertain.
Some industries stand to benefit, while others will suffer. The potential for higher inflation, consumer backlash, and retaliatory measures pose significant risks.
As we all watch these policies unfold, one thing is clear: policymakers, businesses, and consumers must prepare for the uncertainties of this evolving trade landscape.