Time (or Buying American) Won’t Erase the Economic Harm of Higher Tariffs

President Trump acknowledges his tariffs will “short term [cause] some little pain” but claims they’ll be “worth the price that must be paid.” Trump is right that his tariffs will cause “a little disturbance,” but unfortunately, he’s wrong that with time tariffs will bring wealth and jobs creation.

History shows tariffs lead to lasting economic harm, such as lower production and incomes. Data from 151 countries from 1963 through 2014 shows higher tariffs reduce output and productivity, increase unemployment, and worsen inequality. Studies of US tariffs in 2018-2019 confirm they failed to boost employment and instead harmed manufacturing due to rising input costs and foreign retaliation.

When the United States imposes a tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. , it increases the price of imported goods for people and businesses in the United States. (In recent experience, import prices increased by nearly the full amount of the tariff, but even with less than complete “pass-through” of tariffs, import prices would rise.) Higher prices make us import less (which harms foreign businesses as US sales fall), but US production does not automatically grow as a result.

Suppose a US-based business sources parts from a foreign supplier to manufacture equipment in the United States. When it pays a tariff on imported parts, those higher costs will lower its profits. When the business becomes less profitable, it reduces incomes for its workers and business owners.

Instead of accepting lower profits, the business may increase its prices to pass the tariff along to its customers. Imagine customers usually pay $100 for the equipment, but after tariffs they pay $110. When customers pay $10 more for the same product, they have $10 less to spend elsewhere. As people spend less elsewhere, profits for other businesses fall, which reduces incomes for those workers and business owners.

Of course, the main purpose of taxing imported goods is to shift purchases to domestic producers, allowing them to charge higher prices and see higher sales. The US equipment manufacturer may avoid directly paying the tariff by switching to an American-made part if one is available—but this won’t erase the pain or boost US production overall.

To see why switching to American-made doesn’t boost production overall takes a bit of international econ background. When imports fall, the dollar becomes stronger, which makes US exports more expensive for foreign customers. Some imports may be replaced by domestic production, but that same drop in imports causes a drop in US exports.

If the equipment manufacturer switches to an American-made part, it boosts profits for the US part maker, but at the expense of the equipment manufacturer paying the higher price and US exporters overall experiencing lower sales.

For this reason, tariffs are redistributive. They discourage purchases of foreign-produced goods, encourage buyers to switch to higher-priced domestically-produced goods, and place a burden on US exporters. Some domestic producers benefit but at the expense of other people and businesses in the domestic economy.

Tariffs clearly raise costs and prices and lower production and living standards, whether we keep importing goods or switch to domestic alternatives.

The tough choices and trade-offs do not go away in the long run. Instead, over time, tariffs tend to diminish productivity, decreasing how much output we get for the time and resources used. That’s because by changing incentives across different types of production, tariffs reallocate employment and investment toward higher-cost, less efficient areas of the economy.

For instance, the United States is the largest exporter of aircraft, and the largest importer of textiles. Higher tariffs would incentivize manufacturing activity to move from aircraft and toward textile production, so we would producer fewer airplanes for export and more T-shirts for domestic consumption.

Similar shifts would occur across the economy, incentivizing more resources to be used in producing lower-end goods we previously imported at lower prices. Increasing prices we pay for the same goods has the same effect on people as lowering their wages. Consider a real-world example of washing machine tariffs put in place in 2018 under the first Trump administration: the tariffs supported the creation of about 1,800 new factory jobs (with wages starting at $16 per hour) at a cost to US consumers of $800,000 per job.

In some cases, the US economy may not currently produce alternatives for imported goods (and it may be infeasible for some goods to rely completely on domestic supply, like coffee and bananas). In other cases, if tariffs incentivize entirely new lines of production to take place in the US, that buildout would occur over years, and would pull investment and workers away from what they would have been doing otherwise—whether higher value-added manufacturing or service sector jobs.

While tariffs would raise revenue for the US government, that revenue would come at a high cost to the American economy overall. As tariffs lead workers and investment to move toward lower-value production, we become worse off over time—not better off as President Trump imagines.

If foreign countries retaliate to US tariffs, the pain is even greater. Foreign tariffs will increase prices foreign consumers pay for US exports and harm US exporters as they see sales to foreign consumers fall. Retaliatory tariffs can cause dollar depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , which may offset some of the harms on exporters and transfer it to importers. Still, production, incomes, and employment would fall in export-heavy sectors like agriculture and manufacturing due to retaliation.

Contrary to the president’s promises, the tariffs will cause short-term pain and long-term pain, no matter the ways people and businesses change their behavior.

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