The Effects of Tariffs on the Economy
Tariffs are a trade barrier imposed on imported goods and services to protect domestic industries. However, the implementation of tariffs has disastrous effects on the economy. Trump’s plan to revive mercantilism through tariffs is a step in the wrong direction, as it increases production costs, manipulates competition, and creates no net gain in jobs.
Increased Production Costs
Tariffs increase production costs for domestic companies, which in turn leads to higher prices for consumers. For example, if the US imposes a tariff on a British sweater company, it will force Americans to buy domestically, leading to increased demand for American-made sweaters. As a result, the price of American sweaters will rise due to the increased demand, and consumers will have to pay more money for the same product.
Tariffs manipulate competition by forcing consumers to spend more money on a product than they would otherwise. Consumers are better off buying products at the lowest cost that benefits them. Therefore, tariffs create an unfair advantage for domestic industries and make it difficult for foreign companies to compete. This results in a lack of innovation and slows down economic growth.
No Net Gain in Jobs
Trump’s plan to revive mercantilism through tariffs claims to create millions of jobs for Americans. However, this is not the case. If a new industry were to be created due to the tariffs, it would require workers from other sectors of the economy, resulting in no net gain. For instance, if a new sweater company needed 30,000 workers, it would require workers from other sectors of the economy. This shift would create job losses in the industries where workers were taken from, resulting in no net gain in jobs.
The Negative Impact of Trump’s Tariffs on the US Economy: An Economic Analysis
Unfortunately, Trump’s understanding of economic concepts was lacking when he came into office in 2017, and it appears that he still does not comprehend their importance. Despite his efforts to increase tariffs as a means of boosting domestic growth, his tariffs failed to achieve this goal.
A report by economist Erica York of the Tax Foundation revealed that the tariffs imposed nearly $80 billion in new taxes on Americans, representing one of the largest tax increases in decades.
The report also found that Trump’s tariffs reduced long-term GDP growth by 22 percent, wages by 14 percent, and full-time equivalent jobs by 173,000. Numerous economists from academia have confirmed that the tariffs implemented in 2018 and 2019 led to direct burden and deadweight loss.
In fact, the burden costs were estimated to be approximately $800 per household. Additionally, industries also suffered significant losses. Aaron Flaaen and Justin Pierce discovered that the tariffs were associated with “relative increases in producer prices via raising input costs.”
Between February 2018 and January 2020, American companies were estimated to have incurred $46 billion in costs due to the tariffs, and exports of goods also experienced a sharp decline.
The Fallacy of Trump’s Mercantilism and the Benefits of Free Trade
Donald Trump’s claim to bring mercantilism to the 21st century reflects his lack of understanding of economic history. As defined by Murray N. Rothbard, mercantilism is a system of statism that employs economic fallacy to build imperial state power, create monopolies, and provide special subsidies and privileges to favored individuals or groups. This policy led to the formation of monopolies such as the East India Company and French East India Company, costing countries like Great Britain economic growth and freedom of colonial business.
Moreover, this policy had dire consequences, such as the burden of tax revenue used to build the power of the English government and the multiplication of the royal bureaucracy needed to administer and enforce regulations and taxes. The restrictions on production imposed by bureaucrats further hampered the division of labor, leading to loss for consumers.
It was only after Britain extended the trading market that economic growth could be achieved, leading to the Industrial Revolution. Free trade began to flourish, benefiting countries such as China, which embraced it after decades of failing communism. Economists Xavier Jaravel and Erick Sager estimate that free trade gives Americans an extra $260 of spending a year.
According to a report by the Peterson Institute for International Economics, American trade between 1950 and 2016 yielded a payoff of $2.1 trillion, increasing GDP per capita by around $7,000 and GDP per household to $18,000. Companies also see great benefits, as almost 11 million jobs depend on the export of American goods and services, as well as foreign direct investments.
Despite the great benefits of free trade, people like Donald Trump ignore basic economics and implement disastrous economic policies.