Would Trump’s Tariffs Send Prices Soaring for Americans?

 

Would Trump’s Tariffs Send Prices Soaring for Americans?

December 12, 2024

Rich Barlow

https://www.bu.edu/articles/2024/would-trumps-tariffs-send-prices-soaring/

 

Last month, President-elect Donald Trump declared that he would impose a 25 percent tariff on all Canadian and Mexican imports on his first day in office, drawing immediate warnings from the leaders of those nations. “Any tariffs imposed by one side would likely prompt retaliatory tariffs, leading to risks for joint enterprises,” Mexican President Claudia Sheinbaum said. Canada’s prime minister, Justin Trudeau, said he’ll retaliate, too, and that tariffs would raise the cost of living for Americans.

 

Trump argues that tariffs would goad our neighbors to control the flow of undocumented immigrants and drugs into the United States. He also promised a 10 percent tariff on Chinese imports, on top of the levies he imposed during his first term and that President Joe Biden maintained. China also manufactures ingredients used by drug cartels to make fentanyl.

 

Legally, Trump could enact import taxes as part of an ongoing investigation into China’s trade practices; Biden did that this year. Alternatively, Trump advisors suggest he might declare an economic emergency to justify tariffs, which could trigger a prolonged court challenge. But some analysts say he might seek Congressional approval for tariffs as part of a larger tax bill in 2025, when tax cuts passed in his first term are set to expire.

 

BU Today spoke with Mark Williams (Questrom’93), a Questrom School of Business master lecturer in finance, about the potential effects of Trump’s tariffs. Williams has been a ​​senior trading floor executive, a bank trust officer, and a Federal Reserve bank examiner. He has made presentations on virtual currencies to the World Bank and the Bretton Woods Committee, served on Biden’s 2020 campaign economic subcommittee, and is former president of the Boston Economic Club.

 

Q&A

with Mark Williams

BU Today: Are Trump’s tariffs a good idea—at least on China, long accused of unfair trade practices and protectionism?

Williams: In response to China’s unfair trade practices, the United States already has numerous tariffs in place to punish them by making the cost of their goods higher and less attractive to purchase. However, the latest Trump plan would escalate the trade war. Such aggressive policies are a bad idea, as they would increase consumer costs, spike inflation, raise interest rates, kill jobs, and reduce economic growth as measured in GDP [gross domestic product].

 

Trump justified his tariffs as leverage to control undocumented immigrants and drugs coming over the border. Might there be a national security justification here?

There is a tradeoff. Over decades, Mexico has a poor track record in drug interdiction and keeping harmful substances from flowing north to the United States. China has also been implicated in supplying ingredients of fentanyl. If Trump’s tough tariff talk reduces illegal drug flow, then this would help address a pressing national security issue.

 

However, in doing so, if Trump follows through on the large tariff hikes, trade between Mexico and China would decline, and US consumers would be stuck paying higher prices at places such as grocery stores, gas pumps, and car dealerships.

 

Trump’s first-term tariffs on steel, clothing, and kitchen cabinets did lead American producers to boost production of those things. Does that justify tariffs on at least some products this time around?

“Made in America” might have a nice ring to it, but it is hard to sustain in a global market, where consumers demand products at lower costs.

 

Tariffs increase the cost of imported goods, temporarily protecting domestic markets, and they can raise incentives for onshore manufacturing and sales. Short-term, there could be some production gains. However, as Trump proved during the 2018 tariffs on imported steel, they did little to materially increase the number of jobs in US steel plants. Moreover, once tariffs were slapped on China, they quickly retaliated by making many US products more expensive; this eventually led to a reduction in the number of US export jobs.

 

The challenge is that US wages are drastically higher than those in China, and we have a labor skill gap and shortage, making it unclear how onshore production without significant subsidies and a new labor force can be competitive over the long term. Trump’s policies would also diminish the number of immigrants, a workforce which, over the last decade, has made up the majority of US labor force growth. Locating, financing, constructing, and getting onshore factories up and running also takes time and is capital-intensive. Proposed Trump policies could increase deficits and interest rates, making the cost of funding new factories more expensive and less economical.

 

Made in America’ might have a nice ring to it, but it is hard to sustain in a global market, where consumers demand products at lower costs.

Mark Williams

 

Trump says tariffs are paid by our foreign competitors, but aren’t they actually assessed on the American firms that import and sell foreign-made goods?

If it were only that simple.

 

The costs of tariffs are borne by the importer and collected by customs and border protection agents. These funds then flow to the coffers of the US Treasury. However, importers attempt to recoup these added costs—taxes—by passing them on to consumers. Given China is one of our larger suppliers, these tariff hikes will ultimately be paid for by US consumers. Based on a 2024 study conducted by the Peterson Institute for International Economics, Trump tariff hikes could increase the annual costs to US consumers by $2,600. When goods are more expensive, consumers are effectively made poorer.

 

The United States is the largest importer of goods in the world. China is a top supplier of these goods. Tariffs against China, even if they were not to retaliate, would increase costs to US consumers. Tariff wars are also an impediment for global trade, increasing the cost of domestic manufacturers who source raw materials from abroad.

 

Tariffs should never be viewed in isolation, as such taxing can produce a ripple effect. When the US taxes target China goods, the producer country can retaliate by raising taxes on US-produced goods.

 

At a time of high US deficits, Trump says tariffs provide the government with extra revenue. Is that grounds for raising tariffs?

Tariffs put money in the pocket of the government, but take it out of the pocket of consumers. As a result, tariffs are an inefficient way for governments to collect tax revenue.

 

Mexico has threatened to retaliate with its own tariffs if Trump follows through. How seriously would that hurt the US economy, and what are the other downsides of tariffs?

Engaging in a tariff war with Mexico is dangerous policy and creates a game of thrones, as trading partners retaliate by adding their own tariffs. Given two-thirds of the US economy is driven by consumption, increases in prices could slow down the economy. Mexico is our top trading partner, representing over $800 billion, or 16 percent of trade. This is a two-way trading relationship. As partners, both gain economic benefit from this relationship. The United States in 2023 sold over $322 billion in goods such as computers, car parts, and other electronics to Mexico. The country sends about 80 percent of its products to the United States, ranging from agricultural goods that stock our grocery shelves to oil we use for the cars we drive.

 

Mexico’s new president has also made it clear she would not sit quietly, but would retaliate. Doing so could raise inflation and cost 400,000 US jobs. Under such a scenario, there are no winners.

 

If tariffs are bad, how should the United States most effectively help working-class citizens, many of whom voted for Trump?

Tariffs can help politicians get elected, but they are not the best way to stabilize and grow a middle-class workforce. The costs of everything from homes, cars, and groceries continue to outpace wage increases, which has left the working class anxious about job security and future financial prospects.

 

Macroeconomic trends, including globalization, continue to challenge our working-class workforce, as US manufacturing jobs have moved and remain offshore. Higher wages needed to keep pace with higher daily costs make US workers less competitive globally, especially given that rapidly developing lower-wage countries such as India are eager to step in.

 

To rebuild a stronger middle class will require investment in workforce development, training, targeting strategic US industries, and increasing innovation and entrepreneurship. Increasingly, technology is a greater part of most jobs and occupations, requiring ongoing training. Greater investment in vocational schools to produce a highly skilled technical workforce should be mandatory. Entrepreneurism is also vital, as new start-ups are important job creators. One of the engines of job growth is immigrants. While research has proven that foreign-born are two times more likely to start new companies than native-born counterparts, Trump’s anti-immigration policies are at odds with what is needed to ignite start-up generation, new jobs, and grow the middle-class workforce.