In simple terms, tariffs are a tax paid by importers in the country that levies tariffs; they are designed to raise the cost of that import and therefore curb demand and reduce competition for protected domestic industries. Economists generally dislike them because they are a regressive tax that hits those who can afford it the least, while failing to deliver promised returns. The jobs lost due to tariffs can exceed those retained or protected via onshoring.
The president and his advisors have stated that they see tariffs as a way to shrink the US trade deficit, which they view as a weakness. Firms stocking up in early 2025 ahead of tariff announcements have pushed the deficit to three times its end-of-year 2019 level, making the trade gap appear all the more urgent. Economists view our trade deficit as more of a reflection of the size and buying power of the US鈥檚 large consumer base and productive firms.
The difference between the two views matters. The economic research suggests that we would need a fairly large drop in domestic demand to reduce our trade deficit. Historically, improvements in the trade deficit were driven by recessions or a contraction in domestic demand. 听
Other stated goals of the tariffs by the administration are that they will act as a primary revenue generator to pay for tax cuts, gain concessions from major trading partners and protect domestic industries. The last is the most common rationale for tariffs.
There is evidence that tariffs do favor protected industries, although often at the expense of other industries. The 2018-19 tariffs on steel boosted employment in the steel industry but were more than offset by losses in overall manufacturing employment. Higher input costs triggered a manufacturing recession back then.
The most vulnerable industries to tariffs are those that have the most complex supply chains. Some products, such as vehicle parts, cross the US border multiple times before they become fully assembled products.
This dynamic makes it almost impossible for consumers to escape tariffs on manufactured goods and 鈥淏uy American鈥�2听鈥� a phrase that originated from a 1980s trade dispute with Japan.
In the late 1980s, US policymakers and auto manufacturers grew concerned that the ballooning deficit with Japan would impact domestic manufacturing. The US levied tariffs on Japan, targeting automobiles, computers and other electronics. The tariffs shrank the trade deficit with Japan over the following two years, but only marginally. They were not sufficient to upend long-term investments already in place.
Costs incurred by tariffs can either be absorbed by the importer or passed along to consumers. Pass-through was high for the 2018-19 trade war; nearly all the cost of those tariffs resulted in final price increases. Spillover effects were substantial, with tariffs on washing machines resulting in commensurate price increases on non-tariffed dryers.3
The situation today differs from 2018. The scope and breadth of tariffs is much larger than what was discussed then, or even in the 1980s. The embers of inflation are still smoldering and could be at risk of reigniting at the same time that longer supply chains are more prone to disruption.
Not all firms will be able to pass on their additional costs. Consumers have begun to push back against price hikes after the bout of post-pandemic inflation. That could lead to lower profits, decreased investment, layoffs and business failures.
Companies could move production onshore; that is easier said than done. Constructing a plant takes years, while there is no perfect substitution between products made domestically and ones made abroad. The steel industry added no additional capacity in response to the 2018-19 tariffs.
Tariffs reduce competition, which removes the incentives to innovate. Hence, trade wars tend to be accompanied by slower productivity growth.
Heightened uncertainty is another hurdle. Tariffs levied via executive order can be revoked as quickly as they are enacted, which provides little certainty for firms to onshore. Adding insult to injury are the tighter credit conditions that accompany periods of high uncertainty.4
听
