Tariff might be the “most beautiful word” to Donald Trump but for economists it tends to provoke an altogether different reaction.
Most are “generally sceptical” about tariffs, said NBC News, “considering them a mostly inefficient way for governments to raise money and promote prosperity”.
So who is right? And what are the arguments for and against?
Pro: increases government revenue
Tariffs are essentially another form of tax and as such generate revenue for governments. Trump has claimed tariffs created “vast wealth for our country” and “will pay off our debt and MAKE AMERICA WEALTHY AGAIN!”
A quick look at the data behind this claim “tells a compelling story”, said Sky News‘ economics editor Ed Conway. Indeed, “for nearly all of the 19th century, tariffs imposed on goods imported into America provided more than half the government’s revenues“.
Yet as a source of revenue relative to the size of today’s global economy, income from tariffs is “modest”, said the Council on Foreign Relations (CFR). The Washington-based Tax Foundation estimates that the latest round of tariffs will generate around $100 billion per year in extra tax revenue, a fraction of the total federal budget.
Con: impact on consumers and economy
One of the “most immediate impacts of tariffs is a rise in consumer prices”, said EV Magazine. Studies by the National Bureau of Economic Research on Trump’s first term suggest “most of the economic burden” of increased tariffs “was ultimately borne by US consumers”, BBC Verify said.
Trump’s proposed tariffs this time round would lower the incomes of the poorest fifth of Americans by around 4%, and by nearly 2% for the wealthiest fifth, according to estimates by the non-partisan Peterson Institute for International Economics.
Significant short-term price hikes on imported goods, ranging from electronics and cars to everyday groceries, could in turn “contribute to inflationary pressure“, said EV Magazine, forcing central banks to “raise interest rates, potentially slowing economic growth and increasing borrowing costs for businesses and consumers”.
The problem, said Sky News’ Conway, is that “there is only so high one can lift these fees before they begin to stifle activity, making goods so expensive to import that domestic consumers face economic damage”.
Pro: protect domestic businesses and jobs
“In most cases” tariffs are “intended to protect local industries by making imports more expensive and driving consumers to domestic producers”, said the CFR. Supporters argue that tariffs incentivise companies to manufacture goods within their own country, reviving industry while bolstering supply chain resilience.
“Longstanding concern” about the loss of manufacturing jobs to countries with lower labour costs has been a main driver for the anti-globalisation movement in the developed world, said the BBC. Trump has promised that his tariffs will mean “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”.
Con: lobbying and corruption
Tariffs often lead to “cascading protectionism and create a fertile ground for corruption”, said the free-market think tank the Cato Institute. Trump’s 2018–19 tariffs on China led to “a complex process of exclusion requests” and “lobbying”.
In the absence of appropriate oversight, tariff exemptions “become political currency – traded between firms and officials in what amounts to a pay-to-play arrangement”, said Forbes. Rather than economic factors, decisions are determined by “lobbyists, campaign contributions, and political connections”.
Pro: protecting national interests
Politically, tariffs can be used as an “extension of foreign policy”, said Investopedia. Imposing them on a trading partner’s significant exports “may be used to exert economic leverage”.
The use of tariffs as a “negotiating tool” with other countries “might well be their main function in the hands of Mr Trump”, said Conway. Take the recent 25% levies imposed on Mexican and Canadian goods, which are aimed at forcing both governments to stop the flow of illegal immigrants and supply of fentanyl into the US. Trump has already successfully wielded the threat of tariffs to break a deadlock with Colombia over the return of deported migrants.
Con: retaliatory tariffs
Retaliatory – or “tit for tat” – tariffs are among the “multifaceted harms of protectionist measures”, said the Cato Institute.
A study by economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard University and the World Bank concluded that retaliatory levies imposed by China and other nations on US goods during Trump’s first term had “negative employment impacts”, especially for farmers.
But “if Trump’s trade war fizzled as policy” it “succeeded as politics”, said NBC News. Support for Trump and Republican congressional candidates rose “in areas most exposed to the import tariffs, including the industrial Midwest and manufacturing-heavy Southern states like North Carolina and Tennessee”.