Would Donald Trump’s taxes on trade hurt US consumers?

Donald Trump, the former president of the United States, has made a bold promise to increase tariffs on foreign goods if he is elected president again. He has proposed tariffs that could reach as high as 20% on various imports and even 60% on products coming from China. In some cases, he has suggested a staggering 200% tax on certain imported vehicles. Trump believes that these tariffs are essential for boosting the US economy, safeguarding American jobs, and increasing government revenue. He has claimed that these taxes will not burden American consumers, stating that they will primarily affect other countries. However, many economists view this assertion as misleading. To understand how tariffs function, it is important to know that they are essentially taxes imposed on goods as they enter the country. The amount of the tariff is based on the value of the imported product. For instance, if a car valued at $50,000 is subject to a 10% tariff, the importer would have to pay an additional $5,000 in taxes. This tax is paid by the American company that imports the car, not the foreign manufacturer. In 2023, the United States imported approximately $3,100 billion worth of goods, which accounted for about 11% of the country's GDP. The tariffs imposed on these imports generated around $80 billion in tax revenue for the US government. The real question, however, is who ultimately bears the economic burden of these tariffs. If the American importing company decides to pass the cost of the tariff onto consumers by raising retail prices, then it is the American consumer who ends up paying more. Conversely, if the importing company absorbs the cost of the tariff and does not raise prices, it will experience lower profits. There is also the possibility that foreign exporters may lower their wholesale prices to maintain their customer base in the US. All three scenarios are theoretically possible, but evidence from Trump's first term suggests that the economic burden primarily fell on American consumers. In September 2024, a group of respected economists was surveyed about whether they agreed with the statement that imposing tariffs results in a significant portion of the costs being borne by consumers in the country that enacts the tariffs. Remarkably, only 2% of the economists disagreed with this statement. To illustrate the impact of tariffs, consider the example of washing machines. In 2018, Trump imposed a 50% tariff on imported washing machines. As a direct result, the price of washing machines increased by approximately 12%, which translated to an additional cost of around $86 per unit. This meant that American consumers collectively paid an extra $1. 5 billion for washing machines that year. There is no reason to believe that the effects of even higher tariffs under a future Trump administration would differ significantly in terms of who bears the economic burden. The Peterson Institute for International Economics, a non-partisan think tank, has estimated that Trump's proposed tariffs would lead to a decrease in American incomes, with the impact varying from around 4% for the lowest-income households to about 2% for the wealthiest households. A typical middle-income family could lose approximately $1,700 annually, while another think tank, the Centre for American Progress, estimates that middle-income families could face losses ranging from $2,500 to $3,900. Additionally, they warn that another round of tariffs could contribute to rising domestic inflation. Trump has also argued that his tariffs are necessary to protect and create jobs in the United States. He claims that under his plan, American workers will no longer have to worry about losing their jobs to foreign competition; instead, he asserts that foreign nations will be the ones concerned about losing jobs to American workers. This argument is rooted in longstanding fears about the decline of US manufacturing jobs due to competition from countries with lower labor costs. For instance, when the North American Free Trade Agreement (Nafta) was implemented in 1994, the US had nearly 17 million manufacturing jobs. By 2020, that number had dropped to around 12 million. However, many economists argue that it is misleading to attribute this decline solely to trade, as advancements in automation and technology have also played a significant role. Research on the impact of Trump's tariffs during his first term indicates that they did not lead to a net increase in jobs in the US. For example, when Trump imposed a 25% tariff on imported steel in 2018, the number of jobs in the steel industry was still lower by 2020 than it had been in 2018. While it is theoretically possible that employment might have declined even further without the tariffs, detailed economic studies suggest that the increase in domestic steel prices due to the tariffs negatively affected employment in other manufacturing sectors that relied on steel as an input. Trump has frequently criticized America's trade deficit, which is the difference between the value of all goods imported and exported in a given year. He believes that trade deficits are detrimental to the economy. In 2016, just before he took office, the trade deficit stood at $480 billion, approximately 2. 5% of the US GDP. By 2020, it had risen to $653 billion, around 3% of GDP, despite the implementation of his tariffs. One explanation for this increase is that Trump's tariffs raised the international value of the US dollar, making American products less competitive in global markets. Another factor contributing to the persistent trade deficit is that tariffs can sometimes be circumvented in a globalized economy. For instance, when the Trump administration imposed a 30% tariff on solar panels in 2018, it was discovered that some Chinese manufacturers had shifted their assembly operations to countries like Malaysia and Vietnam to avoid the tariffs. While some economists support Trump's tariff policies as a means to bolster US industry, they represent a minority view within the profession. The Biden administration has criticized Trump's proposed extension of tariffs but has maintained many of the tariffs he implemented after 2018, particularly on imports such as electric vehicles from China, citing national security and unfair competition as justifications.