Would Donald Trump's trade taxes hurt American consumers?

Donald Trump announced a drastic increase in tariffs on foreign goods entering the US if he is re-elected president.

He promised customs duties – a form of tax – of up to 20% on goods from other countries and 60% on all imports from China. He even talked about a 200% tax on some imported cars.

Tariffs are a central part of Trump's economic vision – he sees them as a way to grow the U.S. economy, protect jobs and raise tax revenues.

He claimed campaign that these taxes “won't be a cost to you, they're a cost to another country.”

This is almost universally considered misleading by economists.

In practice, a customs duty is a domestic tax levied on goods when they enter the country, proportional to the value of the imports.

So a $50,000 (£38,000) car imported into the US subject to a 10% duty rate would be charged $5,000.

The fee is physically paid by the domestic company importing the goods, not the foreign company exporting them.

In this sense, it is a straight tax paid by domestic US companies to the US government.

Within 2023 imported by USA goods worth approximately $3,100 billion, equivalent to approx 11% of US GDP.

And the tariffs imposed on these imports filed $80 billion this year, about 2% total US tax revenues.

The more complicated issue is where the final “economic” tariff burden falls, rather than the upfront fee.

If a U.S. importing company passes on the tariff costs to the person purchasing the product in the U.S. in the form of higher retail prices, the economic burden will be borne by the U.S. consumer.

If an importing U.S. company covers the tariff costs itself and does not pass them on, then that company is said to bear the economic burden in the form of lower profits than it would otherwise have made.

Alternatively, it is possible that foreign exporters will have to reduce their wholesale prices by the value of the tariff to retain their U.S. customers.

In such a scenario, the exporting company would bear the economic burden of the duty in the form of lower profits.

Theoretically, all three scenarios are possible.

But economic research on the impact of new tariffs imposed by Trump during his first term from 2017 to 2020 suggest that American consumers ultimately borne most of the economic burden.

Study conducted by the University of Chicago in September 2024, he asked a group of respected economists whether they agreed with the statement that “the imposition of tariffs results in a significant portion of the tariffs being borne by consumers of the country imposing them through price increases.” Only 2% disagreed.

Let's use a specific example.

In 2018, Trump imposed a 50% tariff on washing machine imports.

Scientists estimate As a result, the value of washing machines increased by approximately 12%, equivalent to $86 per unit, and American consumers paid a total of approximately $1.5 billion annually for these products.

There is no reason to believe that the impact of even higher import tariffs imposed by the incoming Trump administration will be different in terms of where the economic burden falls.

The nonpartisan Peterson Institute for International Economics he estimated Trump's new tariffs would reduce Americans' incomes, with the impact ranging from about 4% for the poorest fifth of the country to about 2% for the richest fifth.

According to the think tank's estimates, a typical household in the middle of the U.S. income distribution would lose about $1,700 a year.

The left-wing think tank Center for American Progress, using a different methodology, has an estimated amount a loss of $2,500 to $3,900 for a middle-income family.

Various researchers also warned that another large round of U.S. tariffs would risk another sharp increase in domestic inflation.

But Trump used a different economic justification for his tariffs: that they protect and create U.S. jobs.

“Under my plan, American workers will no longer worry about losing their jobs to foreign nations; instead, foreign nations will worry about losing their jobs to America.” – he said during the campaign.

The political context for Trump's tariffs was long-standing concerns about the loss of U.S. manufacturing jobs to countries with lower labor costs, especially after signing the North American Free Trade Agreement (Nafta) with Mexico in 1994 and China's accession to the World Trade Organization in 2001.

In January 1994, when Nafta went into effect, there were almost 17 million manufacturing jobs in the United States. By 2016, this number had dropped to approximately 12 million.

Economists, however, say it is misleading to attribute the decline to trade, citing rising levels of automation are also an important factor.

And researchers who studied the impact of Trump's first-term tariffs did not show any significant positive effects regarding overall employment in protected U.S. industries.

Trump imposed 25% tariffs on imported steel in 2018 to protect American producers.

Do 2020 r. total employment in the US steel sector was 80,000, still less than 84,000 in 2018.

Trump criticized America's trade deficit, which is the difference between the value of all the goods a country imports and the value of its exports in a given year.

“The trade deficit is very bad for the economy.” he said.

In 2016, just before Trump took office, total deficit of goods and services amounted to $480 billion, or approximately 2.5% of US GDP. Despite the tariffs, it grew to $653 billion by 2020, or about 3% of GDP.

Part of the explanation, according to economistsis that Trump's tariffs have increased the international relative value of the US dollar (by automatically reducing demand for foreign currencies in international trade) and that this has made US exporters' products less globally competitive.

Another factor behind the failure to close the trade deficit is the fact that in a globalized economy in which multinational companies operate, tariffs can sometimes be bypassed.

For example, the Trump administration imposed a 30% tariffs on solar panels imported from China in 2018.

US Department of Commerce presented evidence in 2023 that Chinese solar panel manufacturers moved their assembly operations to countries such as Malaysia, Thailand, Cambodia and Vietnam, and then shipped the finished products from these countries to the US, successfully avoiding tariffs.

Some economists support Trump's tariff plans as a way to boost U.S. industry, such as Jeff Ferry of the Coalition for a Prosperous America, a national lobbying group, but they are a small minority in the industry.

Oren Cass, director of the conservative think tank American Compass, he argued that tariffs could encourage companies to pursue more manufacturing operations in America, which he believes brings benefits to national defense and supply chain security.

The Biden/Harris administration, although sharply critical of Trump's proposed tariff expansion, has left in force many of the tariffs he introduced after 2018.

This also happens imposed new tariffs on importing things like electric vehicles from China on grounds of national security, US industrial policy and unfair domestic subsidies from Beijing.