How Bad Will the Tariffs Hurt?

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If you've been thinking about upgrading your TV, smartphone, or video game console, you might want to do so sooner rather than later because estimates suggest that, under various proposed tariffs, these products could see price increases of 25 to 60%. Since many electronic gadgets come from China, they are expected to be impacted by Trump's sweeping tariff proposal—and these are just the tip of the iceberg. Unlike previous administrations that applied tariffs selectively, the Trump administration aims to implement widespread tariffs on both friends and foes.

In early February, the US announced a 10% tariff increase on Chinese goods, a 25% tariff on products from Canada and Mexico, and a 25% tax on all steel and aluminum. Considering that these are our top three trading partners, this move affects a broad range of items that Americans buy, from vehicles and appliances to clothes, furniture, and food. At the time of this recording, only the tariffs on China had taken effect. However, if all the proposed tariffs are enacted, it would signal a return to an era of economic protectionism that few people today remember—and the impact could extend far beyond just a thousand-dollar PlayStation.

Let's clarify a common misconception: tariffs are not taxes paid by foreign exporters seeking access to the American market. Instead, tariffs are levied on the importers of foreign goods, meaning that American companies and consumers ultimately bear the cost. By artificially increasing the price of foreign products, the aim is to encourage Americans to spend their money on domestically produced items.

Proponents of tariffs often reference the period between the Civil War and World War I, when tariffs accounted for 40 to 90% of government revenue and American industry grew rapidly. However, that era was also marked by significant economic instability, multiple depressions, and vast inequality—the Gilded Age, after all. During the Great Depression, Congress enacted the Smoot-Hawley Tariff Act in a desperate bid to rescue the economy, but the tariff increase backfired, further choking economic growth and, according to some, even contributing to the rise of fascist leaders in 1930s Europe. It was nearly the last time America attempted to use large tariffs to stimulate the economy.

That is until today. Although Donald Trump appears to have revived tariffs, globalization set the stage long ago. Post-World War II free trade policies made economic sense for America—factories thrived, raw materials flowed freely, and other countries eagerly purchased American products. Over the past 50 years, however, corporations have discovered the profitability of hiring cheap foreign labor and relocating factories abroad, which has contributed to a significant decline in US manufacturing jobs, even though some economists attribute this decline more to technology than to free trade.

Today, the US trade deficit—the gap between our imports and exports—is the largest in the world, particularly with China. We buy far more from China than China buys from us, a situation some interpret as economic exploitation. China has a long history of engaging in unfair trade practices, including currency manipulation, intellectual property theft, wage suppression, and artificially low pricing to dominate markets.

In previous administrations, targeted tariffs were used to punish such practices. For example, during Obama's final year, tariffs on Chinese goods generated $12 billion in revenue. However, Trump's proposals go far beyond that, harking back to the protectionism of the late 19th century. Many Americans, especially those in regions most affected by globalization, view tariffs as a symbol of prioritizing US workers over international trade.

Despite this symbolic appeal, most economists warn that a blanket tariff policy would cause more harm than good. US importers are likely to pass on these costs to consumers through higher prices. Retailers like Walmart, which source most of their inventory from China, would probably implement sweeping price hikes. Additionally, many American manufacturers that import materials and machine parts would face increased production costs, further driving up prices. Economic studies of Trump's tariff plans estimate that they could cost the average American household between $2,000 and $7,500 per year.

There is also the risk of retaliatory tariffs. China has already announced plans to impose its own tariffs on American-made goods, which could force some US companies to scale back production and cut jobs. In fact, during Trump's first term, a 25% tariff on imported steel did increase demand for American steel, boosting the industry by $1.5 billion a year by 2021 and raising manufacturing employment by 0.3%. However, American products that rely heavily on steel—such as automobiles, motorcycles, appliances, and farm equipment—became more expensive to manufacture, leading to production cuts that reduced manufacturing employment by 1.1%. Retaliatory tariffs further decreased employment, resulting in a net loss of 1.4% of US manufacturing jobs, according to a 2019 Federal Reserve Board study. Oxford Economics estimated that this test round of tariffs reduced real household income by $675 per year in 2021.

It is possible that, over time, the economy might stabilize and wage gains could eventually outpace price increases. However, building the necessary infrastructure and supply chains to replace foreign imports could take years or even decades. Moreover, the shrinking US population, historically low unemployment rates, and potential limitations on immigration raise questions about whether there will be enough workers to meet domestic demand.

Some argue that tariff revenue could be used to create a safety net for Americans during this adjustment period, much like the taxpayer-funded subsidies that supported American farmers hurt by China’s retaliatory tariffs during Trump's first term. Yet, Republicans have indicated plans to use much of this revenue to finance further income tax cuts. Since income taxes primarily affect wealthier Americans while tariffs disproportionately burden the poor, this approach would shift the tax burden onto those least able to afford it.

The downsides of these tariff plans are significant, leading many to suspect that they may be a bluff intended to extract concessions from foreign governments rather than a genuine effort to strengthen the US economy. Despite years of rhetoric about helping American workers, Trump has shifted the stated goal to reducing the flow of drugs and immigrants across the border. In early February, both Canada and Mexico were granted one-month postponements of the tariffs in exchange for minor border-related concessions, though critics argue these concessions were minimal.

If reducing drugs and immigration is indeed the primary aim of Trump's tariff policy, then it serves less as an economic measure to bolster US businesses and more as a diplomatic tool to influence foreign governments and global business trends. However, this strategy introduces the risk of corruption. Historically, tariff exemptions have often been awarded based on political influence—a practice that appears to continue. A 2024 study found that companies that made heavy donations to the Republican party during Trump's first term were more likely to receive exemptions than those that supported Democrats. Securing a tariff exemption can offer a massive competitive advantage; for example, an electric car company allowed to import Chinese batteries at a lower cost than its rivals could sell cars more cheaply and dominate the market. In effect, this approach gives the government the power to pick winners and losers.

It is still too early to determine the final form of Trump's tariff policy, and economists remain uncertain about its long-term effects. While there is some hope it might eventually spark another boom in US manufacturing, even his advisors admit that there will likely be a period of economic pain first. In the meantime, it is wise for consumers to adjust their budgets to account for higher prices on at least some items and to maintain an emergency fund in case of unexpected layoffs.