“The most beautiful word in the dictionary is tariff,” former President Donald Trump told the Economic Club of Chicago last week. “It’s my favorite word.”
In recent weeks, the Republican candidate for president has increasingly put forward proposals to increase fees on foreign goods entering the United States. He has called for a blanket tariff of 20% on all imports, tariffs of at least 60% on products from China, 100% tariffs on countries that move away from trading with the dollar, and a 2,000% tariff on vehicles imported into Mexico built.
Economists from across the political spectrum oppose these ideas, saying the most likely outcome would be higher prices for consumers. Here’s a look at how rates work and why they’re so crucial in a cost-of-living election.
Tariffs, also called excise duties or levies, are a deterrent. They penalize domestic companies that import foreign-made goods to encourage companies to source more of those items from within the country. When a tariff is imposed on a product — whether it’s a watermelon, a washing machine or a high-tech part — any U.S.-based company that imports it must pay the government a percentage of the price of that item, with federal officials determine the rate. .
Trump has said the revenue from these payments would be enormous. He proposes using it to fund everything from tax cuts to subsidized child care. In a lengthy response to a question on the latter issue last month, he said that “those figures” from tariff revenue “are so much bigger than any of the figures we are talking about, including childcare costs”.
But any company facing a tariff has two options: either stop importing the targeted product and buy it domestically instead, or increase the retail price. When companies cannot find the goods they need within U.S. borders at prices they can afford, or at all, they tend to pass some or all of the cost of the tariff on to consumers.
For that reason, Vice President Kamala Harris has called Trump’s tariff proposals “a sales tax on the American people,” which she said would increase costs for households by $4,000 annually. Adam Hersh, a senior economist at EPI Action, the advocacy group of the left-leaning Economic Policy Institute, puts that estimate lower, but still in the four-digit range of $2,500 to $3,000 per year.
“Donald Trump won’t just impose a $4,000-a-year tax hike on the middle class – his plan will permanently drive up inflation, crush American manufacturing jobs and hurt manufacturing workers more than any other sector,” said Joseph Costello , spokesperson for the Harris campaign. a statement. “Time and again, independent economists warn of the economic dangers of Trump’s plan, and Americans should heed that.”
The Trump campaign did not respond to a request for comment.
Whatever the final costs, many economists agree that higher, widespread tariffs would drive up prices for consumers.
“She is right to say that his rates are similar to sales taxes in the sense that consumers around the world will ultimately have to pay,” Alan Deardorff, an economist at the University of Michigan who specializes in international trade, said of the claim from Harris. But he warned that only fully imported products were likely to rise at the same rate as the tariff itself; the cost of goods assembled in the U.S. from a mix of imported and domestic parts, such as cars and airplanes, would likely rise less.
While tariffs are generally disliked by economists, they now have more bipartisan support than they have had in decades. Both sides agree that the endless lowering of barriers to global trade has had damaging economic and social consequences.
Some farmers and factory owners complained during the Trump administration that the tariffs were hurting their bottom lines, leading the White House to funnel tens of billions of dollars in subsidies to agricultural producers. But the Biden-Harris administration has largely not changed course. It expanded its predecessor’s duties on Chinese goods by about $300 billion, even adding additional tariffs on $18 million worth of Chinese goods in strategic industries including electric vehicles, semiconductors, steel and aluminum.
Trump and allies who endorse his trade policies argue that tariffs protect and strengthen domestic markets, spurring homegrown producers to expand. They also see them as an economic weapon. Trump recently threatened Illinois-based tractor manufacturer John Deere with a 200% tariff if it moves production to Mexico.
Some economists had long theorized that if the U.S. imposed tariffs on a product, foreign producers would lower their prices to avoid being pushed out of the large, lucrative U.S. market. Rates had been falling around the world for decades before the Trump administration implemented its 2018 tariffs, creating a natural experiment to test this proposition.
In the years since, Deardorff said, “you can’t find anything in the data to indicate that foreign prices have fallen.”
Even if the tariffs force some foreign producers to lower prices, U.S. consumers wouldn’t necessarily reap the benefits, said Monica Morlacco, an economics professor at the University of Southern California. At best, the price would simply drop less than the amount of the tariff.
“Consumer prices will always increase if there is a reasonable analysis of rates,” she said.
Some of Trump’s previous tariffs even prompted domestic manufacturers to raise prices. In 2018, Trump imposed tariffs of 20% to 50% on many household washing machines from South Korea, prompting Seoul-based LG to raise prices in response. But so did the brand’s U.S. competitors, as the newly more expensive foreign models put pressure on demand for U.S.-made products.
Reviewing the price data, University of Chicago researchers later found that these results showed “no clear distinction between domestic and foreign brands, all within a range of 5 to 17 percent” – and dryers, which were not subject at rates, but which are often purchased together with the price. rings, also saw price increases.
An article the following year from the New York Federal Reserve found that Trump’s tariffs and other protectionist trade policies were costing American consumers $1.4 billion a month. “The tariffs were almost entirely passed through to U.S. domestic prices, so the entire impact of the tariffs fell on domestic consumers,” the authors wrote.
Beyond prices, “people believe the tariffs will protect domestic jobs, and they like the idea that we can help our American workers,” said Robert Lawrence, professor of international trade and investment and senior fellow at the Peterson Institute for International Economics . . “I think they are mistaken.”
This is partly due to the way in which tariffs affect global trade. He said: “We will buy less from foreigners because their goods are more expensive. We will therefore have this negative effect on our inputs, and therefore we will also be able to sell less abroad.”
However, voters have mixed opinions on tariffs. An NBC News poll this month found that just over a third of voters were in favor of universal tariffs, while most others were opposed or indifferent, but a Reuters/Ipsos poll in mid-September found that a narrow majority supported tariff plans Trump supported.
When people think about tariffs, they think about bringing back jobs or opening factories, said Maurice Obstfeld, a senior fellow at the Peterson Institute.
“These are laudable social objectives,” he said. “But what the public understands less about tariffs is that they raise prices for consumers and also for businesses that use protected inputs. They are not really effective at bringing back jobs on a large scale.”
The nonpartisan Tax Foundation, which typically advocates lower taxes and other policies that benefit business, has estimated that Trump’s latest tariff plans would reduce U.S. gross domestic product by 0.8% and cost 684,000 jobs. When jobs are created, they often cost more than what the job pays, economists say. In the University of Chicago washing machine study, researchers estimated that each job created costs consumers about $815,000 annually.
Still, Obstfeld recognized the political appeal of tariffs in many regions suffering the loss of manufacturing jobs. It’s easy for economists to say that uncompetitive industries should go bankrupt, but “we’re talking about real people with real jobs,” he said.
“This is one of the reasons why protection can be popular,” Obstfeld said. “Because otherwise a lot of people will be left out to dry.”
This article was originally published on NBCNews.com
