The incoming administration has made tariffs a centerpiece of its domestic and foreign policy agenda. On the 25th of November, Trump announced a 25% tariff on all imports from Canada and Mexico and a 10% levy on all Chinese imports. This prompted a surprise visit to Mar-a-Lago from Prime Minister Trudeau and a flurry of activity from President Sheinbaum.
Tariffs are nothing new in U.S./China relations: according to CBS News, two-thirds of Chinese goods are already subject to tariffs, and nearly 60% of the goods China imports from the U.S. are taxed. However, Trump’s strong stance on tariffs does feel like something new.
An America First policy will likely come with some serious challenges: strained relationships with trading partners, potentially higher prices on consumer goods, and pressure on U.S. companies that export goods. Like so much else in life, how effective tariffs will be will depend on their design and implementation and which sectors are targeted.
Here’s a comprehensive look at the advantages and disadvantages of tariffs:
Positives (Advantages) of Tariffs
A primary goal of tariffs is the protection of domestic industries. Tariffs shield American industries from foreign competition by making imported goods more expensive. This allows domestic businesses to grow and maintain market share. As an example, U.S. tariffs on steel help domestic steelmakers compete with cheaper foreign imports.
A key result of protecting an industry is job preservation. Tariffs can help preserve or create jobs in sectors threatened by foreign competition. Tariffs on imported textiles may support jobs in domestic textile manufacturing.
Tariffs also work to reduce trade imbalances. Tariffs reduce the demand for imports, potentially narrowing the trade deficit by encouraging domestic production and consumption. Trade deficits can lead to an overdependence on external capital flows, which we saw in the COVID-19 pandemic.
For the first 124 years of our country’s existence, we relied on tariffs and excise taxes to fund the federal government. Even a robust tariff policy is unlikely to do much about our federal budget deficits but could amount to trillions of dollars over the next 10 years.
Tariffs can play a role in national security by protecting defense, energy, and technology industries, which are vital for our security. Tariffs can help ensure that these sectors remain robust and self-reliant. A key example would be tariffs on semiconductors to promote domestic production and reduce reliance on foreign suppliers.
With less competition from foreign imports, businesses may be more inclined to invest in domestic production, innovation, and workforce development. All of those things are obviously good for American wages and gross domestic product.
The United States has an interest in purely human affairs, as witnessed by our foreign aid. Tariffs can discourage imports from countries with poor labor standards, environmental practices, or human rights records, promoting ethical trade.
Finally, tariffs can be used as a negotiating tool to pressure trading partners into fairer trade agreements or to address unfair trade practices, such as subsidies or dumping.
Negatives (Disadvantages) of Tariffs
Inflation is a key concern about tariffs; increasing the cost of imported goods typically leads to higher prices for consumers. This is regressive; it disproportionately impacts lower-income households. Tariffs on electronics or clothing, as just two examples, make these goods more expensive for consumers.
Tariffs often provoke retaliatory measures, which can harm exporters and escalate trade wars. China imposed retaliatory tariffs on U.S. agricultural products during the 2018 trade war, hurting American farmers. This is why tariffs are often more effective as a negotiating tool than as an actual economic policy.
Modern economies rely on complex global supply chains. Tariffs on intermediate goods (e.g., steel, components) increase costs for manufacturers and disrupt production. We saw this during the pandemic, as Automakers faced higher costs due to tariffs on steel and aluminum, and the prices of both new and used cars rose dramatically.
By protecting less competitive industries, tariffs can discourage innovation and lead to inefficient resource allocation. Artificially propping up declining industries can stifle technological advancement. Soviet Bloc countries provided a powerful example of this during the Cold War.
Reducing the volume of trade can slow economic growth, particularly in export-dependent industries or economies. This was most famously shown during the Great Depression when the Smoot-Hawley tariffs deepened the downturn and had the opposite of their intended effects.
Tariffs can create tension with trade partners, undermining diplomatic relationships and cooperation. Trade disputes between the U.S. and EU over tariffs have occasionally strained alliances, as has Trump’s insistence that members meet their NATO pact defense commitments. Fair trade may be worth the short-term strain.
Tariffs often lead to more tariffs, and reduced access to foreign markets can harm export-focused industries, notably agriculture and energy. In the Trade War of 2018 – 2020, American soybean farmers lost market share in China due to retaliatory tariffs.
Implementing and monitoring tariffs involves bureaucracy and increasing administrative costs for governments and businesses, all of which eventually make things more expensive and less efficient. And finally, tariffs can create opportunities for corruption, as businesses may lobby or bribe officials to secure exemptions or favorable treatment.
Tariffs can obviously do some good things, like correcting unfair trade, encouraging domestic investment, and bringing in new revenues. But tariffs can be inflationary, cause disharmony, and slow global growth.
Why and how tariffs are implemented will really matter. It’s more than possible that just the threat of tariffs will be enough to secure more favorable trade practices. This is the art of the deal, and we’ll all have a ringside seat to see how things work out for the new administration and for the American people.
