I’m a retired guy who depends on his 401 (k) to live. Naturally, I have been in a state of terror these last few days, and I’m fearful for the days to come. Economists have talked about the adverse effects of tariffs ad nauseam, but it still seems that many misunderstand what they are. I would never claim to be an economist, but I thought I would do my best to define them according to my understanding. This post is my personal opinion.
Tariffs are a tax on the US consumer.
This statement is true. It is not a fee paid by the exporting country. A product comes into a US port and can only be delivered to the US vendor if the US vendor pays the tariff. The vendor then has the option of passing costs on to the consumer. In cases of a high tariff, it is most likely that the vendor will pass it on as they need to make a profit.
Corporations are beholding to their shareholders, who always want to see increased gains. They are not beholding to their customers. Think of a tariff as an exceptionally high sales tax added on top of the regular sales taxes.
Is this the first time that the US has used tariffs?
No, they have been used many times, including in Trump’s last presidential term. Then, they were used to a much more limited degree since others in the administration advised against them. Those constraints have been removed this time around.
What tariffs were imposed by Trump during his first term?
During his first term, most of Trump’s tariffs were on raw materials, with a 25% tariff on steel and a 10% tariff on aluminum. These tariffs were lifted on Canada and Mexico in 2019. Specific tariffs amounting to 34 billion dollars were placed on China, which retaliated with a reciprocal 34 billion dollar counter-tariff on the US.
Did Trump impose tariffs on specific manufactured products during his first term?
Trump did impose a few tariffs on products, notably solar panels and washing machines. The Whirlpool Corporation (makers of Whirlpool, KitchenAid, Maytag, and Amana washers) petitioned the president for the tariffs as they had difficulty competing with the Korean brands Samsung and LG. Tariffs were not placed on clothes dryers, but manufacturers chose to raise the prices of those items as well; this would mean greater profit for companies like Whirlpool.
The washing machine tariff raised the cost of a washer and dryer by nearly $200. Biden canceled this tariff. Manufacturers did drop the prices a bit, but they were still substantially higher than pre-tariff prices. Once tariffs increase prices, they will likely not return to their pre-tariff levels. The consumer pays the price.
Did the first-term tariffs move manufacturing and jobs to the US?
Yes, some plants moved to the US, creating an estimated 1000 jobs. However, around 74,000 jobs were lost due to the slowed economy, so the net numbers showed a significant job loss.
How did Trump’s first-term tariffs impact citizens and the overall GDP?
From: https://en.wikipedia.org/wiki/Tariffs_in_the_first_Trump_administration#Further_reading
A May 2019 analysis conducted by CNBC found Trump’s tariffs are equivalent to one of the largest tax increases in the U.S. in decades.[20][21][22] Studies have found that Trump’s tariffs reduced real income in the United States, as well as adversely affecting U.S. GDP.[23][24][25] Some studies also concluded that the tariffs adversely affected Republican candidates in elections.[26][27][28]
Are tariffs a new idea in the US?
No, tariffs have been used in the US in the past. It was the primary way the federal government covered operating expenses before a Federal income tax was established in 1913. The early United States was primarily an agrarian society, making it very difficult to calculate an income tax. It was easier to determine the cost of things entering the country. However, by the Civil War, it became evident that tariffs were inadequate to fund the government’s expanding role. The Civil War was supported by increasing tariffs, government bonds, duty taxes, and the sale of public lands.
Are there other examples of significant tariffs in the US and the impact that they had?
William McKinley, a Republican, sponsored the McKinley Tariff Act of 1890, which raised tariffs on imports to almost 50%. He was a protectionist who wanted to increase industry in the US and an imperialist who wanted to annex Canada to acquire its natural resources (sound familiar?).
The tariffs caused a steep increase in consumer prices, which resulted in a landslide Democrat victory in the 1890 congressional elections.
From a New York Times newspaper article published in 1890:
The Republican campaign orators and pamphleteers say that the various import duties levied by Congress are paid by the foreigners who send goods to America, and they deny point blank that the price of any article which may be called a necessary expense will be increased to Americans by the operation of the new tariff law.
And
Fortunately for those who believe in tariff reforms, the question as to who pays the tariff taxes, and likewise the pleas which are made in answer to this question by the partisan defenders of the new law, may be referred to the arbitrament of incontestable facts. It is no longer necessary to meet theories with theories. Let the facts, which are multiplying every day, tell who it is that pays the onerous tariff taxes. They will answer that the American people pay these taxes and that the burden of them rests most heavily upon the poor, inasmuch as there are very few of the necessities of life the prices of which are not increasing on account of the McKinley tariff.
Industry growth did increase in the US during the 1880s-1940s as the US transitioned from an agricultural society to an industrial urbanized one. Times were different then, and global manufacturing giants like China did not exist.
Modern economists have analyzed the impact of the McKinley Tariff. Kevin Bryan summarized the work of Douglas Irwin (a Dartmouth professor and expert on trade policies) as follows:
Irwin concludes that the protection did not pass a cost-benefit test: the welfare losses (to consumers and perhaps related industries) outweighed the gains to producers and any learning-by-doing benefits. This echoes a general finding in the tariff history literature: while high tariffs clearly redistributed income in favor of protected manufacturers, they were not an unequivocal net benefit to the overall economy’s growth.
In other words, Professor Irwin felt that the McKinley Tariff did not benefit the US economy.
The Democrats lowered these tariffs with the Wilson-Gorman Tariff Act of 1894.
Are there any other examples of the impact of high tariffs levied by the US?
The Smoot-Hawley Tariff Act of 1930 was supposed to protect American industries during the Great Depression. It placed tariffs on over 20,000 items, about 20% of all imported items. President Herbert Hoover signed the act in June 1930. This resulted in a trade war with other countries, which launched counter-tariffs on US items. The impact of these tariffs was to stagnate the world economy further and contribute to more job losses in the US and abroad. It is now understood that the Smoot-Hawley Tariffs lengthened the Great Depression. It had the opposite of its intended effect.
What about the “Liberation Day” tariffs of 2025?
The full impact of the above tariffs are still unknown. The economy was doing well and consumer inflation was lessening at the end of 2024, but it has been worsening under the Trump administration, with inflation punching back.
The impact of the extraordinarily high tariffs has had other consequences beyond financial, as many ally countries are now pulling away from US influence and forming alliances with each other. This could allow another world power, like China, to create stronger partnerships with nations, including European countries. Doing so would most certainly weaken the US’s role as a world power.
I have been monitoring European, Middle East, and Asian news outlets, and many countries echo the concern that the US can no longer be trusted and that they need to find solutions that protect themselves from the new instability and imperialism of the US.
Trump notes that he is only charging ½ of reciprocal tariffs. The layperson may assume that these countries have massive tariffs against US industries. That is not the case. The Trump tariff calculations have nothing to do with other countries’ tariffs and have baffled economists. They seem based on a trade deficit and make little economic sense.
Syria is under US economic sanctions, so its trade with the US is minuscule, only a few million dollars primarily for artwork. However, since that is still more than what we export to Syria, the Trump administration has calculated that Syria has an 80% tariff on the US and is charging a 40% tariff on all imports from Syria. And let’s not forget tariffs imposed on uninhabited islands and impoverished African nations. If this makes no sense to you, it is because it makes no sense.
The federal government says that Russia was one of only a few countries excluded from tariffs because we already have sanctions on them. Yet we have sanctions on Syria, but we imposed a 40% tariff on them. What gives?
The trade deficit from most countries is because we buy more from them than they buy from us. We buy from them because their products cost less; they don’t buy from us because our products cost more than they can get elsewhere. That is simple economics.
US-owned companies have lowered their costs by manufacturing products abroad. Countries like China have also developed superior supply chains and a highly skilled workforce making it more desirable to manufacture in other places. Lastly, we now have a global economy where American-manufactured products often include parts and materials from other countries. I’ll include a video of one entrepreneur who tried to use US-based manufacturing companies and the barriers that he faced.
If you can’t click on the image use this link: https://youtu.be/jCS-LS4LUXk
The “Liberation Day” tariffs have already launched a trade war, likely leading to a recession and possibly a depression. We are seeing some signaling of this with the stock market crash of the last few days.
If we look historically at the role of tariffs, the “Liberation Day” tariffs will result in higher prices on almost everything US consumers buy. This includes cars assembled in the US, as many of their parts are foreign-sourced. This will strain the pocketbooks of many Americans, some to the point of collapse. If the recession proceeds to a depression the entire country will suffer.
Some new factories will likely come to America, but history says the overall economic impact will be negative. The US was economically the world’s envy for the last few years, but those times will be over.
Re-establishing new factories in the US can cost a company billions of dollars, which they may not want to incur, as US policies have been erratic and chaotic as of late. Additionally, since these tariffs are based on executive orders, they could change on a whim or with a new administration. Companies want stability and predictability. Does it make sense for a company to close an efficient factory in another country and spend a billion dollars to build one in the US? Some companies will say, “Yes.” Others will say, “No.” As countries like China and India develop their middle class, industries may sidestep the US and concentrate on those vast markets.
Neighboring countries will likely seek other trading partners. When Canada faced the McKinley Tariffs in 1890, it shifted trade from the US to other British Commonwealth nations. This option exists today on a much broader level with a world economy, and Canada has already established a deal with energy-starved Japan to start shipping oil to them.
Prolonged tariffs will negatively impact all countries, including the US, a scenario that benefits no one.
Wait, why do we care about Canada selling oil to Japan? Aren’t we going to “Drill, baby, drill?”
Contrary to what you may hear, the US is already the largest oil producer in the world and has been for the last 6 years. The reason we buy oil from other countries is economic. Our oil refineries were built to refine a particular grade of oil, which is not the oil that our wells now produce. Canada produces the correct type of oil for our refineries, so it is better for us to buy from them and sell our oil to countries that have different refineries that can process it. Oil companies are reluctant to build new refineries in the US as it would be astronomically expensive, and they already have the facilities elsewhere. Even if we doubled our oil production, it would not change our need to import oil.
So what is the answer for US manufacturing?
The US market is a big one, but there are many other huge markets in the world including the European Union, India, and China. It makes little sense for companies to completely shift their production to the US as this will increase their prices for these other markets. To return to an isolationist economy would seem impossible and not economically practical for the US at this time. The way to reduce manufacturing costs in the US is to pursue greater automation/robots while reducing the salary and benefits of US workers. Neither of these options benefit US workers.
The industrial growth of the 1950s happened for many reasons. First, we had massive post-war manufacturing factories while the rest of the world was in ruin. Additionally, we offered higher education to the working class via the GI bill. This resulted in an intellectual explosion and the creation of new industries, including the semi-conductor industry. It seems unlikely that we can return to our manufacturing prowess of the 1950s because the rest of the world has moved on and now can produce just about anything from tooth brushes to spaceships on their own. What they need from us is our technical expertise and intellectual property. We have been “selling” those.
Is retraining of the underemployed the answer? That is a difficult question. Is it reasonable to expect the average high school graduate to go back to school to become a research chemist or a aeronautical engineer? Probably not, and if they could we would then have a glut of such individuals.
The biggest problem seems to be the transfer of wealth from lower classes to upper classes. If that is the biggest problem it is likely one solution point. Options like improving the minimum wage, the re-establisment of protective unions, and bettering education and healthcare for the underserved would accomplish some of these goals. All of these options would encourage the growth of the middle class and a large middle class means economic growth.
Obviously, I’m not an economist and I’m sure that there are many who have better solutions as this is just my two cents.
The bottom line:
- Past attempts to enact significant tariffs on other countries have been unsuccessful and damaged the American economy.
- The Smoot-Hauley Tariff Act of 1930 worsened and lengthened the Great Depression and increased unemployment.
- Former friendly trading partners will likely form alliances excluding the US, which will weaken, not strengthen, our global influence.
- “Liberation Day” tariffs will increase inflation and likely throw the US (and the rest of the world) into another great recession and potentially a great depression.
- Opening major new US factories can take 5-10 years, and many companies may not pursue this due to the uncertainty of the US government.
- We will never be able to compete with countries that have very low labor costs, especially with simple-to-manufacture items. Other countries will buy from those countries, not the US.
- It makes more sense to export things in which we are leaders, like computing and intellectual/technical services.
- People (like myself) who rely on retirement investments will spend less out of financial fear, further stagnating the US economy.
- As inflation increases, the general population will spend less, resulting in job loss in many sectors.
- Industries may try to bust labor unions to create a cheaper labor force. This move will not benefit US workers in the long run.
- Tariffs will have the most devastating impact on the poor as their safety nets are already being impacted in many ways, including Medicaid, Social Security, and other governmental programs. This is how uprisings start.
- Returning manufacturing to the US to 1950s levels seems very unlikely as the rest of the world has now caught up and in some cases exceeded our abilities in this area.
The above is my personal opinion.
Peace
Mike
