Ever since President Trump’s election campaign, the word “tariffs” has gained significant currency. In economics, tariff is a charge levied by an importing country on an imported good from another country. From President Trump’s POV, tariffs sound great on paper. Very bigly, very MAGA, wow.
The positioning of tariffs during President Trump’s election campaign was simple – tariffs are a way to punish countries that play dirty with the USA. Tariffs will protect and even increase American jobs, stick it to the other countries, and overall, Make America Great Again, he insisted. But here’s the thing: they’re basically like punching yourself in the face to get back at someone who annoyed you.
When a country slaps tariffs on imported goods, a few things happen, and none of them are particularly fun:
First, the consumers – in this case the Americans – end up paying more. That cheap washing machine from South Korea? Not so cheap anymore. Those steel imports? Watch construction costs soar.
Suppose an item came from China and was sold for $100 in the USA. Now, if there is a 25% import tariff on Chinese goods at the point of entry, the additional $25 on this item is not paid by the Chinese government as the President had them believe. That additional cost is simply added to the final product cost and is passed on to the American consumer. In other words, it turns out that when you make imports more expensive, regular folks foot the bill. For a country like the USA that doesn’t manufacture a lot of everyday use items and are dependent on imports for those, this means tariffs are a sure way to higher domestic inflation.
The domestic price increase might do either of two things – one, cause American consumers to forego consumption because of the high inflation, or, two, cause manufacturing to shift to the domestic shores.
The President had them believe that the second case would be the inevitable result – tariffs would create American jobs. Well… not really. For every job “saved” in industries protected from imports, typically many more would be lost in related industries that use the imported raw materials. For example, when steel gets more expensive, companies that make cars, appliances, and construction equipment take a hit. They either raise prices (hello again, inflation!) or cut jobs.
Here’s another reality check: Even if they wanted to bring all manufacturing back to the US, they couldn’t just flip a switch to do it. Building new factories takes years, not days or months. And where exactly would they find all the skilled workers? America has a serious shortage of trained manufacturing talent – from experienced welders to robotics technicians. You can’t create a specialised workforce overnight, and many young Americans aren’t exactly lining up for factory jobs. Their education system would need years to catch up with this sudden demand.
The final kicker? Other countries don’t just sit there and take it. They retaliate with their own tariffs, making it harder for American companies to sell their products abroad. Further, the exporter country might initiate export controls for crucial materials. Yesterday, China announced export controls for about two minerals including tungsten, a critical mineral typically used in industrial and defense applications, as well as tellurium, which is used to make solar cells, besides retaliatory tariffs on a bunch of materials including coal and crude oil.
Not only retaliatory tariffs, exporting countries may undertake other actions that may hurt the interests of the country imposing the tariffs, such as the antitrust investigation that China announced against Google.
And here’s the economic reality: trade isn’t a zero-sum game. When countries specialise in what they do best and trade freely, everyone generally benefits. Tariffs are like throwing sand in the gears of this system because a Head of State is mad about losing at a game that wasn’t actually a competition in the first place.
So next time someone tells you tariffs will punish America’s adversaries and also solve their economic woes by generating eye-popping revenues, remind them: sometimes the best solution is to not shoot yourself in the foot in the first place.