"Would Donald Trump’s taxes on trade hurt US consumers?
Donald Trump has pledged to drastically increase
tariffs on foreign goods entering the US if he is
elected president again.
He has promised tariffs - a form of tax - of up to 20%
on goods from other countries and 60% on all imports
from China. He has even talked about a 200% tax on some
imported cars.
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.
He has claimed on the campaign trail that these taxes
are "not going to be a cost to you, it’s a cost to
another country".
This is almost universally regarded by economists as
misleading.
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 10% tariff, would face a $5,000
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.
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."
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