The allure of tariffs is strong: protect domestic jobs, bolster national security, and level the playing field against unfair trade practices. Years of analyzing global markets taught me otherwise, to very different conclusions. In fact, it’s usually much more full of pitfalls and less favorable than advocates would lead you to believe. As a result, tariffs usually prove to be a self-inflicted harm, coming back to hurt the consumers they were meant to protect.
One of the most direct, and easily recognizable impacts of tariffs are the resulting price increases for the American people. This is something that academic research has shown time and time again. A recent December 2021 review by Pablo Fajgelbaum and Amit Khandelwal uncovers an important silver lining. As a result, U.S. consumers of imported goods have shouldered the majority of the burden of tariffs, paying higher prices. This is not merely theoretical economics. American families are experiencing the real-world impact every time they purchase unavoidable everyday products, from clothes to high tech electronics.
She notes that the effect reaches further than just the average consumer. This recent trade war has seriously intensified with radical increases to tariffs. One clear and measurable impact of this conflict has been to lower overall real income in the U.S. and China. While the magnitude may not be catastrophic relative to overall GDP, it's a clear indication that protectionist measures can backfire, hurting the economies they are designed to strengthen. In fact, the Biden administration has estimated that the tariffs we imposed would lower after-tax incomes. On average that cut could be as high as 1 percent by 2026.
One of the favorite talking points for tariffs is their ability to improve national security. By raising the costs of those imports, domestic production becomes more competitive. This critical move advances our goals to decrease dependence on foreign suppliers. While we agree this makes sense in principle, the practical application leaves a lot to be desired. Even then, the Commerce Department under George W. Bush recognized the value of heterogeneous imports. They understood that dependence on “safe” foreign suppliers—including those of our U.S. allies in the Western Hemisphere—reinforces our national security by reducing reliance on any one source.
Before long, tariffs suppress both innovation and domestic manufacturing. This weakens the ability of domestic industries to compete and ultimately represents a threat to national security. When companies face increased costs for imported parts or raw materials, they need to make difficult business decisions. They will likely reduce their research and development, postpone investments in new equipment, or even lay off workers. This only serves to undermine the industrial base that tariffs are intended to protect.
The promise of job creation is another often touted rationale for tariffs. Former President Trump famously claimed that tariffs would "create jobs like we have never seen before." The empirical evidence proves it’s not true. Michael Strain is the director of economic policy studies at the American Enterprise Institute. He warns that if not done carefully, protectionism could actually hurt the workers it needs to help the most.
In a new analysis, ARC’s Lydia Cox found a disturbing effect of steel tariffs. Imposed by then-President George W. Bush in 2002-03, these tariffs caused an estimated net loss of 168,000 jobs per year in steel-using industries. This highlights a critical point: while tariffs might provide a temporary boost to specific domestic industries, they often come at the expense of other sectors that rely on imported goods. A Council on Foreign Relations study suggested that tariffs of 25% on steel and aluminum may "likely boost" steel prices. Even in the best case scenario, net jobs are never created, just shifted from one sector to another by tariffs. Cox's study showed that the tariffs "neither raised nor lowered U.S. employment" where they were supposed to protect jobs.
Given the complexities of global trade, we know that as soon as tariffs are established, other countries typically respond with their own tariffs. This just sets up the cycle of retaliatory tariffs further damaging everyone’s interests. As a chief analyst at OverTraders.com, I’m feeling the bite of trade disputes on markets daily. They add to volatility and uncertainty, making it increasingly difficult for businesses to plan and invest wisely.
The shares of his economic models leave no doubt. A January 2024 International Monetary Fund paper suggests that reversing the 2018-2019 tariffs would increase US output by 4% over three years. According to the Tax Foundation’s General Equilibrium Model, the Trump-Biden Section 301 and Section 232 tariffs have really hurt the economy. In total, these tariffs have decreased long-run GDP by 0.2 percent, lowered the capital stock by 0.1 percent, and lost 142,000 full-time equivalent jobs. Many economists agree that even these further tariffs would reduce US GDP by an estimated 0.3 percent. This has included potential tariffs on the EU and all auto imports.
The tariffs on washing machines expired in February 2023 after an initial three-year period and a two-year extension. This year’s event should serve as a reminder that these measures are typically short-lived, fickle, and subject to the whims of political forces. The goal would be to protect nascent domestic industries in the long term. Unfortunately, the political winds that bring us tariffs also allow them to be torn down at a moment’s notice by changing political priorities.
I’m further dedicated to the study of global geopolitics and its effects on the international financial markets. I envision market volatility as an opportunity for profit. I’m always on the lookout for examples where individuals perceive a greater risk than actually is present. I work on the kind of investments that have pre-hated for chaos. Tariffs bring a new element of risk to the table – one that is both sudden and hard to measure.
We get it—there’s a deep desire to protect domestic industries and jobs. The truth is, tariffs are a pretty dumb tool that tends to do more harm than good. They increased prices for consumers and distorted markets. This invites retaliation and can ultimately hurt the specific industries they seek to protect. Instead, they should focus on encouraging innovation, improving education and building smarter infrastructure. In doing so, they will be serving the competitive and resilient economy that we all want, healthy in the long run, not the protectionist economy. The siren song of tariffs is tempting, but the truth is usually a snare.
