Trump’s tariff plan is an inflation plan

Expanded tariffs on imports from China and other trade partners are part of President-elect Donald Trump’s economic plans once he takes office in January. Though he claims his protectionist trade policy will bring jobs back to the US, Trump’s tariffs will come at a steep cost to consumers and the economy as a whole.

“We’re going to bring the companies back,” Trump said during an October campaign event at the Economic Club of Chicago. “We’re going to lower taxes for companies that are going to make their products in the USA. And we’re going to protect those companies with strong tariffs.”

The trade proposals are an expansion of the tariffs Trump levied against China during his first term (which the Biden administration continued). The tariffs Trump has proposed would likely have a far broader and more negative effect on the economy. They would almost certainly lead to an immediate increase in prices. They could also spark a trade war in which the US and its trading partners enact tit-for-tat policies to damage each other’s economies. 

Monday evening, Trump threatened to slap 25 percent tariffs on goods imported from Mexico and Canada “until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!” (The realities of fentanyl trafficking and migrant flows are more complicated than Trump’s post suggests.) Trump has previously proposed tariffs of up to 60 percent on goods imported from China and has suggested smaller tariffs, 10 to 20 percent, on goods imported from other trading partners like the European Union.

It’s worth noting that Trump makes many threats and does not follow through on them. And a post on Truth Social does not, in any form, constitute an official change in US policy.

But Trump does follow through on some threats, and major US trade partners are taking him seriously. The European Union is already planning to issue retaliatory import taxes should Trump enact his proposed tariffs.

Trump’s tariffs, if enacted, are a recipe for inflation, according to economists. Right now, importers are reliant on the availability of cheap, foreign-made products, particularly from China. If they can’t find equally cheap, high-quality alternatives, prices will rise. Any policy to mitigate the effects of that could take several years to have an effect. 

In a second term, Trump and his team seem poised to use tariffs as a threat, no matter the consequences for US consumers and businesses. 

How tariffs work in the real world

At their core, tariffs are “a fairly simple concept,” Dean Baker, senior economist at the Center for Economic and Policy Research, told Vox. “The tariff’s a tax on imports. What happens is, when the goods come in at the ports, we tax them.”

But that tax isn’t levied against the company or government that exports them: It’s paid by the US company that imports the items.

That tax either gets absorbed by the importers or, more likely, passed on to consumers in the form of higher prices. Because of this dynamic, further tariffs on Chinese imports could have major ramifications for consumers, seeing as how many US companies are dependent on Chinese products.

“When you impose this kind of import tariffs from China, then many companies, such as Walmart, Home Depot, and [others] — they import a lot of products from China, so they have to pay a higher price because they have to pay the tariffs,” Christopher Tang, faculty director at the Center for Global Management at UCLA’s Anderson School of Business, told Vox. “So as a result, they have no choice but to pass on some of the cost increase to the consumers. That would trigger higher prices.”

Importers can absorb the cost, but that’s a poor long-term strategy because it “probably leads to layoffs and also lack of competitiveness moving forward,” Sina Golara, assistant professor of supply chain and operations management at Georgia State University, told Vox. And exporters can end up paying a cost to some degree, but that’s because importers will try and find another, cheaper supplier — if they can.

There is still uncertainty as to how all this could go

The tariffs Trump has described could cause two big problems. 

First, they could increase the price of goods. Currently, demand for imported goods is high; according to the US Trade Representative, no other country imports as much as the US does. That demand is met by a steady supply of goods, roughly 15 percent of which come from China.

High tariffs, especially on China, would disrupt that supply and push prices up if demand remains the same. Prices could also rise because of what’s known as seller’s inflation, in which companies take advantage of an economic shock (like a package of new tariffs) to artificially raise the cost of goods.

Importers could try to alter their supply chains, finding suppliers in countries that have lower (or no) tariffs on their exports, to keep prices under control; that has happened somewhat following Trump’s initial tariffs on China. In theory, diversifying the US supply chain is a good thing: A varied supply chain makes it less vulnerable to shocks while also potentially improving other economies. However, finding cheap alternatives for the products Americans demand is no simple task. 

“If it was easy to find a better producer, American companies would have already built relationships with them,” Golara said. In many cases, from electronics to acetaminophen, he told Vox, China “has been their best option, maybe the cheapest or most appropriate, and even if they’re able to find someone else, it’s not going to be at the same price or have the same quality.”  

What’s more, finding those suppliers, building the relationships, and acquiring products at the necessary scale wouldn’t happen immediately; it could take months or years. In the meantime, supply would continue to be limited and prices would be high.

The second issue the tariffs could create is that of retaliatory tariffs, such as the EU’s planned tariffs on American imports.

“It would be very, very unexpected, very rare for [other countries] to do nothing … because they have to show some power of deterrence,” Golara said. 

Retaliatory tariffs tend to hurt select businesses and employees. They make it more expensive for foreign importers to bring US goods into other countries. That tends to depress demand for those goods and can mean trouble for the bottom lines — and employees — of businesses that rely on consumers abroad.  

Essentially, the tariffs could cause price hikes on American imports and exports, which would have reverberating effects across the global economy. 

They are unlikely to boost domestic businesses in the way Trump has claimed. The disruption to imports isn’t likely to help because there’s no way for American firms to quickly and cheaply replace most foreign goods with products made in the US, because that manufacturing capacity doesn’t exist in the US anymore. And domestic firms’ potential marketplace will shrink if retaliatory tariffs are put in place: profits on exports will be harder to come by.

We’ve been here before — in Trump’s first term

The tariffs of Trump’s first term provided a preview into the possible consequences of a trade war and how Trump might respond to it.

In Trump’s first term, China retaliated by placing tariffs on US exports of certain agricultural products. After farm exports dropped sharply, the administration launched a series of programs aimed at subsidizing farmers to protect them from the trade war fallout.

The trade war demonstrates that Trump could attempt to use unusual methods to keep the consequences of his trade policy from reaching consumers and suppliers.

“We shouldn’t underestimate the willingness of Trump to pull unorthodox measures to contain inflation if necessary,” Isabella Weber, associate professor of economics at the University of Massachusetts Amherst, told Vox. “If anything, he is coming back emboldened and might come up with measures that make companies exporting to the US pay part of the tariff bill.”

Inventive use of economic levers aside, it seems almost impossible that Trump’s proposed tariffs won’t have short- and long-term consequences for ordinary Americans and the global economy.