It’s no secret that a core tenet of Trump’s America-first agenda is his plan to impose tariffs on imports. For those less familiar, a tariff is nothing more than a tax between sovereign nations, and their effects can be far-reaching.
His supporters love that he is supporting American-made goods by raising the prices of foreign made products artificially, but they are losing sight of the fact that in the long-term it means the American consumer is going to be punished at the check-out. The end result of tariffs are typically higher prices, lower quality goods and less competitive domestic industries.
Let’s begin by first exploring America’s history of imposing tariffs.
Tariffs are not a new economic phenomenon and a quick search will show you that they’ve been used in our country since the early colonial days. Tariffs are widely seen by economists as an expansionary policy since it can boost domestic production of goods, so it makes sense that politicians have used them to curry favor with their constituents.
However, tariffs can have negative consequences by lowering competition and slowly eroding American innovation. Let’s use an example to highlight this point. Assume for a second that you are in the business of producing a smart phone. Perhaps you run a company called Apple. Imagine waking up one day and learning that Samsung phones are now 15% more expensive due to a new tariff. This means that Apple now controls a larger share of the market.
As a result of less competition, Apple would then have less of an economic incentive to increase the quality of their phones or innovate at the same pace since they are no longer battling Samsung on a level playing field.
Trump himself argues that “a strong steel and aluminum industry are vital to our national security.” However, he fails to realize that the tariffs he imposed via executive order actually weaken the steel and aluminum industries. He also fails to mention that the price of your cans of soda or anything that uses imported steel will simply increase in price.
At a time when the U.S. is running up the federal deficit to record highs, it could appear that the tariffs are generating much-needed revenue. Unfortunately, as a result of the trade war with China, U.S. farmers are being bailed out. The money that is going to farmers is money that could have been used to invest in U.S. infrastructure projects or other national priorities that the American people will actually benefit from.
There’s also the argument to be made that Trump and his team is aware of the negative effect on tariffs and are simply imposing them as a negotiation tactic. No one besides the president can answer that question with certainty, but it’s striking that he’s willing to put American families and industries at risk in order to negotiate with a foreign country.
The long-term impact of the tariffs and trade-war with China won’t be known for years to come, but the early results show that things could worsen meaningfully. Here’s to hoping I’m wrong.