Trump Tariffs: Impacts, Pros, and Cons

Tariffs have been a hot topic in recent years, mainly due to Donald Trump being a vociferous supporter of tariffs. So, are tariffs good or bad? Why does Trump keep talking about imposing tariffs on imports anyway? What could that possibly mean for the economy? Understanding what these tariffs are, their actual workings, and the effects that they may bring upon will surely help you comprehend the task at hand.

What Are Tariffs? The Basic Explanation

Tariffs are basically taxes paid on goods imported from other countries. Think of them as an extra charge when one buys something from abroad. Governments impose tariffs mainly to protect the domestic industries by making foreign products costlier. For example, if a foreign car costs more due to tariffs, the American buyer might rather choose the American-made product.

A historic instance was when, in the 1960s, a tariff rate of 25% was imposed by the U.S. on pickup trucks made by Toyota, with the intention to encourage Toyota to manufacture these trucks in the U.S. Rather than continue to import trucks and pay such tariffs, Toyota chose to establish its own factories here in the U.S., which is a classic example of tariffs acting as an incentive to local production.

The Political and Economic Rationale Behind Trump Tariffs

Trump has made a lot of noise about tariffs. U.S. President Trump's message was simple: Tariffs are tools to help American jobs and industries. He would often call tariffs "beautiful," saying these tariffs can "save our country." Such rhetorical statements ensued that by imposing tariffs, we can make foreign companies pay their fair share and create more jobs at home.

It can be said, however, that tariffs have a number of uses:

• Encouraging domestic manufacture and infrastructure investment
• Making imported products costly so that consumers buy American-made goods
• Raising government revenue through import taxes

Commentators like Charlie Kirk would argue that tariffs are really a "forcing function." They force companies to relocate their production into the U.S. and pay those taxes rather than import and avoid paying. That brings about jobs and helps local businesses.

The Positives of Tariffs

According to the proponents of tariffs or similar protections, the tariffs can also yield quite diverse benefits.

• Building manufacturing and jobs: Tariffs oblige companies to produce in the U.S., creating employment.
• Strengthen the economy: The more robust the manufacturing sector, the higher the potential for economic growth.
• Generate government income: Taxes on imports help to monetize public programs.

In older days, tariffs constituted the major part of U.S. Government revenue. Some hundred years ago, when people were paying taxes, they paid few taxes except for tariffs. Tariffs back then provided sufficient income to run the government. Today, the government needs more, but it cannot just rely on tariffs alone to meet all those needs.

You might do well to think of tariffs as direct taxes on particular industries rather than as universal taxes. This makes sense since it would protect industries critical to the nation without the disadvantage of causing widespread harm.

The Costs and Drawbacks of Tariffs

Tariffs also have costs and drawbacks. The most fearful consequence would be inflation. The everyday goods might become more expensive. When tariffs increase the cost of imported goods, the increased costs tend to flow down to the consumer.

Take the clothes as an example: About 97% of clothes bought in America are made overseas, principally because it is cheaper to import. Countries like Bangladesh and Vietnam maintain wages below one dollar per hour to keep costs on garments low. With an attendant price hike of 10% on clothing via tariffs, it would further aggravate inflation and put more money into the pockets of the American consumer.

Another issue is competitive advantage. Countries like India or Bangladesh can make goods cheaply because they have lower wages and fewer regulations. Hence, many companies prefer to move production abroad. If tariffs raise the price of imports, it does not necessarily mean that American factories will suddenly start producing everything that we need. More often than not, it merely increases the cost of living.

Who Pays the Tariff? The Chain of Cost

Most people think foreign governments are supposed to pay for tariffs. This is not true. The importer — Walmart in this case — would be paying the tariff first. They buy goods from abroad and then they must pay extra fees when bringing those goods into the U.S.

For example, Walmart imported a vacuum cleaner from China for $100. During a 10% tariff, Walmart had to shell out an additional $10 to the government. To keep their profits intact, Walmart could possibly increase prices such that customers have to pay it in increased amounts. Usually, this $10 is passed along to us, the buyers.

Hence American consumers end up paying a higher price for numerous goods. That money raised from tariffs goes into the government treasury; however, should there be a 10% duty across all imports in 2024, it could rake in about $400 billion yearly, which is almost 8% of what the government currently collects over other sources. But this would still not be enough to wholly fund government expenses.

Legal and political challenges to imposing Trump-style tariffs

The Constitution gives Congress authority to set tariffs, not the president. But the president may impose tariffs in some circumstances, such as a threat to national security or a breach of trade agreement.

Therefore, Trump could try for an across-the-board 10% tariff on all imports under the pretext of national security or unfair trade practices. Congress does not give its consent; the President or his representatives may try and wriggle out of congressional controls by citing some exceptions in trade laws, much in the way Biden has used the HEROES Act to forgive student loans.

Political resistance, however, remains strong. Even with some Republican support, there are limits about what Trump can do without congress: the process could get legally entangled or stopped legislatively.

The Future of the Trump Tariffs: Likely Outcomes and Impact

Will Trump impose new tariffs? It is a possibility but not a given. He may well choose to back down and retain the tariffs that target particular countries like China, which apply now. Alternatively, he might push for a minimum of a 10% tariff on all imports and deal with Congress' opposition.

Major implications would be felt in case Trump attempted such sweeping tariffs:

• Prices for a large array of goods would climb
• Inflation would accelerate faster
• The government would realize more revenue in the short term

But if he pulls back on the offensive, tariffs will likely remain limited and focused. In either case, tariffs impact the economy — but they certainly do not ease the path to growth.

Conclusion

Tariffs represent powerful tools with both advantageous and disadvantageous outcomes. They increase the costs foreign firms bear, nurture local production, and fatten government revenue. Yet they also raise prices, spur inflation, and do not flesh out a complete revival of American industries.

If we shed some light on who truly carries the tariff cost — based primarily on consumers — the whole tariff affair would become much clearer. So as we witness political debates unfolding day by day, do remember that eventual tariffs will set the prices for everything from your grocery bills to the health of the national economy.

Track trade policies — their repercussions are greater than one can imagine. Whether tariffs have a net benefit or a net harm depends on how they are wielded and balanced with other economic factors. Set your own opinions, and stay abreast of developments.

About the Author

This article has been written by Nitesh Miller, a finance expert and founder of Fundaura. In operation since 2019 and armed with insights from the best money heads, every bit of advice provided is hard-researched and truly practical. Not even one ounce of fluff-o-land-just real money knowledge you can apply!