Trump's Tariffs: A Cost to American Consumers
C4FE Economic Insights #10
In the latest C4FE Economic Insights, Luis Báez discusses Trump’s Tariffs: A Cost to American Consumers.
Former President Donald Trump has vowed to double down on tariffs if re-elected on November 5th. His running mate, J.D. Vance, recently declared in the vice-presidential debate that "we're getting manufacturing jobs back" not by listening to the "experts" (referring to economists) but by paying heed to "common sense wisdom." The wisdom Vance alludes to is the same mercantilist philosophy Adam Smith refuted over 240 years ago. Nor is it common sense to believe that a ten percent universal tariff on all imports results in lower consumer prices and higher real incomes. If the goal is to enrich the masses, one tried-and-true method is to allow free trade as it will reduce monetary costs for American consumers, enabling them to benefit from the international division of labor.
Theoretically and empirically, the costs of tariffs are disproportionately borne by consumers and domestic industries. The US-China trade war initiated by Trump led to higher prices for both imported and domestic goods, reduced the variety of products available, and redirected trade flows. In 2018, for instance, the prices of washing machines and dryers increased by $86 and $92, respectively. Although around 1,800 jobs in the market for household appliances were directly created due to the tariffs, the annual cost to consumers—$815,000 per job—is exceedingly high, making this job creation hardly economically justifiable1. The burden of these costs falls mainly on middle and lower-income households, while the wealthiest 1% remain unaffected as they often purchase custom, hand-made appliances or rely on professional services for their laundry needs. Furthermore, the gains for domestic producers in a tariff-laden system are typically smaller than the benefits consumers enjoy under free trade. Conservative estimates suggest that the reduction in real income due to deadweight welfare losses in 2018 amounted to approximately $8.2 billion.
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