Some Thoughts on... Raising Tariffs
The material in our classes – Principles of Economics, International Trade and The Global Economy -- has been quite relevant these past few week. With Pres Trump’s tariffs across all imports, discussion on the economic impact on individuals, the country and the world are on everyone’s mind.
A tariff is a tax on imports which increases the prices of goods coming into the US. On the positive side, the tariff creates revenues for the country and increases domestic production of the good. On the negative side, the increased price hurts consumers and causes disruptions to companies.
Most economists would say that the negatives outweigh the positives and that the tariffs cause inefficiencies. The financial markets have declined as people and companies believe the tariffs will cause more harm than good.
It’s important to consider then, why is Pres Trump conducting these policies? I see three potential reasons.
1. He is staying consistent with his perspective.
Since 1987, Trump has spoken out against a trade deficit, when the US imports more than it exports. He believes that trading partners are exploiting the US when we import goods from them. Throughout his campaign he consistently said he would increase tariffs. He sees tariffs as a tool to decrease imports, which they do. Aside from higher prices, there are political and economic costs to reducing imports including the loss of US’ “soft” power” and the dominance of the US dollar in world exchange, but Trump is willing to take these risks.
2. He wants more domestic production.
Trump has promised to bring back manufacturing jobs to the US and he sees tariffs as the best way to do this. A tariff on steel coming into the US, will mean steel production goes up and domestic steel workers are better off. Manufacturing workers are a large part of the voting base for Trump. The higher costs of steel will hurt domestic industries that use steel, e.g. automobiles, construction, and transportation, but Trump is making a national calculus, that the pain now will be worth the benefit later.
3. In this particular case, he is choosing equity over efficiency.
When governments set policy, Economists may frame the choice as an efficiency vs. equity tradeoff. Governments can let the free market run, i.e. have minimal intervention, which maximizes efficiency. Or they can regulate markets which reduces efficiency and promotes equity.
For example, New York has a sales tax on all goods purchased and uses that sales tax money to provide services to its citizens -- education, health care, transportation. New York could choose not to have a sales tax in which case there would be less services provided.
Much of the policy we have seen under the Trump administration has been to cut the size of government and reduce DEI (Diversity, Equity and Inclusion) initiatives through DOGE (Department of Government Efficiency). The administration has explicitly been choosing efficiency over equity (it’s in the name).
In the case of tariffs though, the Government is choosing equity. It wants to restore equity to the communities that have lost out from the efficiency of global trade.
The tariff policies will likely be harmful to the economy. Politically, we will have to wait and see if the policies will be harmful or helpful to the people who voted for the President.