Trump placed significant importance on crafting policies regarding automakers to such an extent that they were his flagship tariffs, regardless of their international repercussions. These tariffs seemed to usher in a new era for American citizens while simultaneously enhancing Trump’s popularity within the country.
The Real Meaning of Tariff Policies
Tariffs serve as taxes placed on foreign imports. In simpler words, if a state charges a 25 percent tariff on foreign cars, any foreign dealerships entering American borders will incur an additional fee of 25% based on the cost of vehicles they wish to sell in the American region.
The Price We Pay: How Tariffs Hit Consumers
Businesses typically pass their costs onto consumers by charging higher prices. This is, in essence, what Trump wants tariffs to do, at least in some cases. The idea is to raise the price of foreign goods so that Americans are motivated to buy made-in-America products. In cars, the expectation is that increased prices on imported vehicles would increase the purchase of American cars, and therefore, more would be produced in America.
The truth is, it is never that simple. Economists warn that all cars would face an increase in price, including domestic ones, because of the tariffs set in place. This is for two reasons. To begin with, a sizable portion of the auto parts used by US car manufacturers are sourced overseas, and the tariffs will increase the cost of their auto parts, which, in turn, raises their cost of production. Secondly, for the most part, domestic auto manufacturers seem to have less competition when tariffs are set. They have more freedom to increase prices without the competitive pressure of international players. Some estimates indicate that the car tariffs proposed by Trump would raise the cost for an average automobile in the US by $4000 to $15000 per vehicle.
The same notion rings true with tariffs on other products. Take the case of foreign washing machines. US importers of these appliances will increase the prices of their products. This, in turn, allows American manufacturers of washing machines to enjoy higher markups because the competition is less aggressive. The period between 2018 and 2023 in the US was particular with respect to the imposition of tariffs on washing machines. During this period, the price of laundry equipment escalated at a worrying rate relative to inflation.
The Yale Budget Lab presents a staggering overall impact of the imposed tariffs on American households. According to the lab, the mere tariffs placed on Canada, Mexico, and China would cumulatively result in a loss of $2,000 in disposable income for the average American household.
The Economic Rationale: Why Governments Use Tariffs
Inevitably there arise questions intercepting the logic of the imposition of tariffs. Why do governments impose tariffs when it obviously leads to elevated prices for consumers? In hindsight, tariffs could be useful for a country in context in multiple ways.
The first possibility involves generating revenue (as is the case in Trump’s presidency). Since tariffs are a type of tax, they provide revenue that can be used to pay debt or public services. It is also the case that, until the U.S. Civil War, tariffs were the government’s primary source of income. In his presidency, Trump proposed to increase tariff income, even suggesting the idea of making a system where taxes are paid exclusively through tariffs. His administration estimates that auto tariffs alone will bring in an income of $100 billion this year.
Another possible advantage is the fostering of new businesses. There are countries that have been able to make use of tariffs in boosting their businesses. For instance, South Korea was able to boost its car production industry in the 1960s through high protective tariffs, enabling the country to compete globally. Some argue that while the auto industry in the U.S. is well established, tariffs on Chinese EVs could allow the U.S. to develop its EV industry.
And finally, tariffs may be employed on national security grounds. Certain goods such as steel, ammunition, and advanced semiconductors are considered important for the military. These are vital for the military. Domestic production of these goods can be encouraged through tariffs, reducing dependence on foreign countries that might not be reliable suppliers. Trump’s tariffs are often framed as arguments to increase the American production capability of essential combat materials.
Trump’s Tariffs and Their Effectiveness: So Far, So Controversial
But whether Trump’s tariffs achieve these objectives is fully realizable remains quite a hotly debated topic.
The tariff revenue is also quite often less than is estimated. The more a tariff succeeds in bringing consumers to buy domestically produced goods, the less the tariff revenue. For instance, if foreign car tariffs are levied and everyone shifts to buying American cars, the car tariff will yield zero revenue. In this case, however, for the tariffs to act as a reliable source of revenue, they must be kept to a level where there is sufficient importation, which is counterproductive towards the goal of increasing domestic production.
Moreover, US manufacturing can suffer as a result of tariffs. Burke (2015) asserts that when the costs of raw materials and components are raised through tariffs, which increases the production costs, the other American manufacturers are also affected. This may result in relatively higher prices, which reduces their market power. That may compel some companies to shift their plants to locations where the higher input cost policies do not apply.
Ultimately, tariffs may lead to a decrease in the disposable income and wages for American workers. A worker’s income, which is shifted towards spending less, may decrease overall demand for consumer goods and services and consequently decrease demand for services and goods produced in America. A market research group, Cox Automotive, speculates that the intended automobile tariffs may decrease demand so drastically that car factories in the U.S. may have to reduce production capabilities by thirty percent.
The retaliatory tariffs set by these other countries complicate the situation. Other countries put tariffs on goods and services produced in the United States, which may limit markets available for performing exports, decreasing demand for goods and services meant for sale outside the performing country. This problem heavily impacts advanced and innovative businesses like the pharmaceuticals, chemicals, and medical equipment industry that depend on selling products to other countries. A Federal Reserve analysis released in 2019 claimed that the tariffs executed during the initial term of Trump’s presidency resulted in a net deduction of jobs offered in manufacturing sectors influenced by these tariffs.
The Uncertain Duration of Trump’s Tariffs
The duration regarding Trump’s tariffs is uncertain. As for other tariffs, he intends them to be more or less permanent, suggesting that some, like those set on Mexico and Canada, are temporarily issued for use as levers in fighting trade negotiations.
The effectiveness and consequences of these tariffs on the American public will dictate their political and economic sustainability. Public sentiment currently skews negative towards tariffs, as a CNN poll found 61% of voters disapprove of them.
Final Thoughts: Difficulty and Diversity in Perspectives
With the potential of both benefiting and harming the economy, tariffs serve as a double-edged sword. It remains a topic of debate whether Trump’s implemented tariffs will be detrimental or beneficial to the U.S. economy. The uncertainty regarding the ongoing trade war poses risks to the economy and will likely remain a primary issue for years to come.
