Would Donald Trump’s tariffs hurt US consumers?

 

Would Donald Trump’s tariffs hurt US consumers?

26 November 2024

https://www.bbc.com/news/articles/c20myx1erl6o

Ben Chu

BBC Verify policy and analysis correspondent

 

Donald Trump has said he will impose new tariffs on goods entering the US from Canada, Mexico and China on his first day in office.

 

The US president-elect said he would sign an executive order for a 25% tariff - or tax on imports - on all goods coming from Canada and Mexico, to get both countries to crack down on illegal immigration and drug trafficking.

 

He has also vowed to hit goods coming from China with a 10% tariff "above any additional tariffs" until it cuts fentanyl smuggling. He has already pledged to target the country with a 60% rate, and has mulled a 200% tax on some car imports.

 

Tariffs are a central part of Trump's economic vision - he sees them as a way of growing the US economy, protecting jobs and raising tax revenue.

 

During his election campaign, he told voters that the taxes were "not going to be a cost to you, it’s a cost to another country".

 

That was almost universally regarded by economists as misleading.

 

How do tariffs work?

In practical terms, a tariff is a domestic tax levied on goods as they enter the country, proportional to the value of the import.

 

So a car imported to the US with a value of $50,000 (£38,000) subject to a 25% tariff, would face a $12,500 charge.

 

The charge is physically paid by the domestic company that imports the goods, not the foreign company that exports them.

 

So, in that sense, it is a straightforward tax paid by domestic US firms to the US government.

 

Over the course of 2023, the US imported around $3,100bn of goods, equivalent to around 11% of US GDP.

 

And tariffs imposed on those imports brought in $80bn in that year, around 2% of total US tax revenues.

 

The question of where the final “economic” burden of tariffs falls, as opposed to the upfront bill, is more complicated.

 

If the US importing firm passes on the cost of the tariff to the person buying the product in the US in the form of higher retail prices, it would be the US consumer that bears the economic burden.

 

If the US importing firm absorbs the cost of the tariff itself and doesn’t pass it on, then that firm is said to bear the economic burden in the form of lower profits than it would otherwise have enjoyed.

 

Alternatively, it is possible that foreign exporters might have to lower their wholesale prices by the value of the tariff in order to retain their US customers.

 

In that scenario, the exporting firm would bear the economic burden of the tariff in the form of lower profits.

 

All three scenarios are theoretically possible.

 

But economic studies of the impact of the new tariffs that Trump imposed in his first term of office between 2017 and 2020 suggest most of the economic burden was ultimately borne by US consumers.

 

A survey by the University of Chicago in September 2024 asked a group of respected economists whether they agreed with the statement that "imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases". Only 2% disagreed.

 

Raising prices

Let’s use a concrete example.

 

Trump imposed a 50% tariff on imports of washing machines in 2018.

 

Researchers estimate the value of washing machines jumped by around 12% as a direct consequence, equivalent to $86 per unit, and that US consumers paid around $1.5bn extra a year in total for these products.

 

There is no reason to believe the results of even higher import tariffs from a future Trump administration would be any different in terms of where the economic burden would fall.

 

The non-partisan Peterson Institute for International Economics has estimated Trump’s new proposed tariffs would lower the incomes of Americans, with the impact ranging from around 4% for the poorest fifth to around 2% for the wealthiest fifth.

 

A typical household in the middle of the US income distribution, the think tank estimates, would lose around $1,700 each year.

 

The left-of-centre think tank Centre for American Progress, using a different methodology, has an estimate of a $2,500 to $3,900 loss for a middle-income family.

 

Various researchers have also warned that another major round of tariffs from the US would risk another spike in domestic inflation.

 

Impact on jobs

Yet Trump has used another economic justification for his tariffs: that they protect and create US domestic jobs.

 

“Under my plan, American workers will no longer be worried about losing your jobs to foreign nations, instead, foreign nations will be worried about losing their jobs to America," he said on the campaign trail.

 

The political context for Trump’s tariffs was longstanding concern about the loss of US manufacturing jobs to countries with lower labour costs, particularly after the signing of the North American Free Trade Agreement (Nafta) with Mexico in 1994 and the entry of China into the World Trade Organisation in 2001.

 

In January 1994, when Nafta came into effect, the US had just under 17 million manufacturing jobs. By 2016, this had declined to around 12 million.

 

Yet economists say it is misleading to attribute this decline to trade, arguing that growing levels of automation are also an important factor.

 

And researchers who studied the impact of Trump’s first-term tariffs found no substantial positive effects on overall employment in US industrial sectors that were protected.

 

Trump imposed 25% tariffs on imported steel in 2018 to protect US producers.

 

By 2020, total employment in the US steel sector was 80,000, still lower than the 84,000 it had been in 2018.

 

It is theoretically possible that employment might have dropped even further without the Trump steel tariffs but detailed economic studies of their impact on US steel still showed no positive employment impact.

 

And economists have also found evidence suggesting that, because the domestic price of steel rose after the tariffs were imposed, employment in some other US manufacturing sectors, which relied on steel as an input - including the agricultural machinery manufacturer Deere & Co - was lower than it otherwise would have been.

 

 

Impact on trade deficit

Trump has criticised America's trade deficit, which is the difference between the value of all the things the country imports and the value of its exports in a given year.

 

“Trade deficits hurt the economy very badly,” he has said.

 

In 2016, just before Trump took office, the total goods and services deficit was $480bn, around 2.5% of US GDP. By 2020, it had grown to $653bn, around 3% of GDP, despite his tariffs.

 

Part of the explanation, according to economists, is that Trump’s tariffs increased the international relative value of the US dollar (by automatically reducing demand for foreign currencies in international trade) and that this made the products of US exporters less competitive globally.

 

Another factor behind this failure to close the trade deficit is the fact that tariffs, in a globalised economy with multinational companies, can sometimes be bypassed.

 

For example, the Trump administration imposed 30% tariffs on Chinese imported solar panels in 2018.

 

The US Commerce Department presented evidence in 2023 that Chinese solar panel manufacturers had shifted their assembly operations to countries such as Malaysia, Thailand, Cambodia and Vietnam and then sent the finished products to the US from those countries, effectively evading the tariffs.

 

There are some economists who support Trump’s tariff plans as a way to boost US industry, such as Jeff Ferry of the Coalition for A Prosperous America, a domestic lobby group, but they are a small minority of the profession.

 

Oren Cass, the director of the conservative think tank American Compass, has argued tariffs can incentivise firms to keep more of their manufacturing operations in America, which he argues has national defence and supply chain security benefits.

 

And the Biden/Harris administration, while sharply criticising Trump’s proposed extension of tariffs, has kept in place many of the ones he implemented after 2018.

 

It has also imposed new tariffs on imports of things like electric vehicles from China, justifying them on the grounds of national security, US industrial policy and unfair domestic subsidies from Beijing.