The Real Pain of Tariffs

Trump’s trade war promises to tax more than consumers

By Jason Furman

When he announced sweeping tariffs on our three largest trading partners on Sunday, President Trump admitted that they would cause “some pain.” He seems to have since recognized this as an understatement, postponing the proposed tariffs on Canada and Mexico—possibly indefinitely—in exchange for no meaningful new commitments on their part. Still, early Tuesday morning large and poorly targeted tariffs did go into effect on China, and more tariffs on allies remain a possibility, even the threats of which have serious economic costs.

Given nearly four more years of a mercurial President, we need to be clearsighted about just how much “pain” tariffs can bring.

The direct pain of tariffs is to the consumer pocketbook. The full tariffs the President proposed—and are still scheduled for a month from now—would cost the typical family $100 per month according to the Yale Budget Lab. Just the reduced ones on China are about $20 per month in higher prices on everything from toys to iPhones, also according to Yale.

The indirect pain from tariffs is even larger. For years critics of globalization argued that these sales taxes gave Americans cheaper products but at the expense of American workers. This is globalization in reverse and it will certainly reverse some of the price declines consumers have enjoyed on manufactured products. But it will also make American manufacturing more expensive, as much of our imports from China are not consumer goods but parts or machines used by manufacturing companies. More expensive production will mean more expensive products.

This would be particularly severe if the tariffs on Canada and Mexico ever do go into effect. The U.S. auto industry relies heavily on parts from Canada and Mexico, and in many cases those parts cross the border back-and-forth a half dozen times during production. Under President Trump’s plan manufacturers would pay a 25 percent tariff every time they crossed the border. That would make it expensive either to make cars in the United States or to import cars with American-made parts from Canada or Mexico. The big beneficiary would be carmakers in Japan and Europe, who will continue to face only 2.5 percent tariffs, and carmakers in Korea who can sell to the United States tariff free.

From the standpoint of individual workers, steelworkers might like steel tariffs, but for every steelworker there are 80 jobs in steel-using industries like automobiles, aerospace, and machine construction that will all be less globally competitive because of their higher import costs.

Economists understand that a tax on imports also results in higher taxes on exports. Our biggest exporters, like Boeing, are also our biggest importers. If further rounds of tariffs after China raise the prices of their imports, they will not be able to build and export as much. Retaliation by foreign countries could further hurt our exporting businesses, as would the recessions likely cause in some of the countries we choose to tax. The result would be fewer imports (hurting American consumers) and fewer exports (hurting American workers). Overall as a nation we would be producing less at scale and less of what we are good at producing.

The China tariffs by themselves will not have a noticeable macroeconomic effect. But the threat of further tariffs has increased inflation expectations and made the Fed even more cautious about further interest rate cuts, both resulting in higher mortgage rates for homeowners and borrowing costs for businesses trying to expand. Uncertainty, as businesses are usually the first to tell anyone, is bad for investment.

Sometimes an economic cost is worth paying. Sanctions on Russia hurt Americans economically but the harm was much less than the current tariffs threaten and the benefits for national security much clearer. China presents a quandary for policymakers because there are enormous gains to our trade relationship but there is also a security rivalry and China does not play by the rules. Targeted trade measures particularly focused on national security may be worth the cost to American consumers and workers—although I would bet against these poorly targeted across-the-board tariffs achieving anything in a cost-effective manner.

Canada and Mexico, on the other hand, are close allies and there is no national security benefit that will come from this threat to their economies—and real risks for our ability to cooperate on national security that were large enough that even Stephen Miller reportedly objected to the Mexico tariffs as proposed.

In his first term as President, Trump waited nearly 18 months to place tariffs on $34 billion of Chinese imports. In his second term it took only two weeks to get to tariffs on $400 billion of imports from China. Further tariffs on $1 trillion of imports from Canada and Mexico are still scheduled for a month from now, and the President has promised tariffs on a further $600 billion coming in from the European Union (albeit possibly not credibly). The real pain that tariffs would cause may be evident enough that Trump will continue finding ways to minimize them while declaring victory. But I would not count on it—and even making such reckless threats increases uncertainty, hurting American workers, consumers and businesses.

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Jason Furman is an economist and professor at Harvard University and a Former Chair of the Council of Economic Advisers of the United States.