On April 2 — a date President Donald Trump has dubbed “Liberation Day” — Trump has vowed to impose reciprocal tariffs on nations that allegedly disadvantage US products through trade, tax, or regulatory policy.
The president’s prolific and haphazard tariff declarations have tanked stock markets, soured consumer sentiment, and thrilled some longtime critics of globalization.
Meanwhile, they’ve left some Americans concerned and confused; tariffs arguably haven’t been this relevant to the US economy in nearly a century. So many are understandably unsure about what tariffs are, how they affect consumers, why governments would implement them, and whether the president’s policy will work on its own terms.
What are tariffs? Tariffs are a tax on imported goods. They generally make affected consumer products more expensive. In theory, well-designed tariffs will also encourage targeted industries to produce more in the United States. And manufacturing certain goods domestically — instead of importing them from abroad — may have national security or economic benefits.
How do tariffs work? It’s helpful here to consider an example. On April 3, Trump will impose a 25 percent tariff on all cars made outside the United States. Businesses that import foreign-made automobiles — such as car dealerships — will need to pay a 25 percent tax on every foreign vehicle that they purchase.
When a business’s costs rise, it typically tries to compensate by raising prices. And the president actually needs his auto tariffs to raise the prices of foreign cars: If the tariff doesn’t make foreign-made cars more expensive for US consumers, it won’t give them any incentive to “buy American.”
In practice, Trump’s auto tariffs are likely to increase the prices of all cars, including American-made ones, US car manufacturers will need to pay tariffs on foreign-made auto parts, and US auto companies will face weaker competition from foreign-made models.
These same basic dynamics apply to tariffs on other goods.
If tariffs hurt consumers, why would governments impose them?
In theory, they could still serve a nation’s interests in at least three ways:
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Generate revenue. Since tariffs are a tax, they provide the government with revenue that it can use to pay down debts or finance spending.
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Nurture domestic industries. Many nations have successfully used tariffs to facilitate economic development. For example, beginning in the 1960s, South Korea sought to build up its domestic car industry. By placing high tariffs on foreign-made cars, the South Korean government ensured that its domestic automakers would have a market for their less-than-stellar vehicles. (It worked — today, South Korean brands like Kia and Hyundai are globally competitive .)
- Improve national security. Some goods and commodities have military value, and there’s an incentive to improve the capacity to produce these items domestically.
So will Trump’s tariffs work? Unfortunately, Trump’s tariffs are unlikely to achieve any of these goals. They are too high to provide a steady source of revenue, because in order to do that, tariffs need to be low enough that importers continue to purchase goods and pay taxes on them.
They’re also likely to actually hurt US manufacturing in three ways: raising prices on the materials manufacturers use, reducing Americans' purchasing power (and thus, goods sales in the US), and making American-made goods less competitive globally as other countries retaliate with higher tariffs of their own.
Want to know more? Read Eric Levitz’s full article explaining the Trump tariffs.
