During his election campaign, President-Elect Donald Trump highlighted the economy and inflation as one of the primary issues he plans to address during his second term, criticizing the Biden administration for mishandling them. On November 25, Trump announced his intent to impose a 10% tariff on goods from China and a 25% tariff on goods from Mexico and Canada.
According to Google Trends, searches for “What is a tariff?” skyrocketed in popularity the day following this announcement. With so much uncertainty surrounding Trump’s economic plan and how it will impact the U.S. in the future, it is more important now than ever to stay informed on developments in his plan and what they may mean for U.S. citizens.
The Council on Foreign Relations defines a tariff as a tax on imports from other countries. This means that for certain goods imported from countries outside of the U.S. to be sold to its consumers, those countries must pay a tax on the goods they wish to distribute. For example, the U.S. imports many materials from China, including steel and aluminum products.
As of September 27, these products’ tax (or tariff) is 25%. For this example, let’s pretend a refrigerator (made of steel and aluminum) manufactured by a Chinese company costs $600. A 25% tariff on $600 would equate to $150. This means that the company would need to pay $150 to the U.S. government before the refrigerator could be sold in the U.S. market.
Based on this definition, we can begin to dissect the effects tariffs have on consumers and businesses, as well as why governments use them. To offset the additional costs of tariffs, foreign companies often compensate by increasing the prices of their goods. As a result, domestic consumers must pay more for impacted imported products. This incentivizes consumers to purchase from more affordable local and domestic businesses, allowing them to compete with foreign companies.
From a broader perspective, tariffs also serve as a tool for the government. Since tariffs are taxes foreign companies must pay, the profit goes directly into the U.S. government for other purposes. In addition, tariffs are used by the government as a means to negotiate, compromise or retaliate against other nations, as foreign economies are impacted by trade policies.
What does all of this information mean regarding Trump’s tariff policy? A lot, actually. Increased tariffs will likely exacerbate the ongoing trade war between the U.S. and China. Many American companies also rely on Chinese businesses for materials and manufacturing, meaning that prices of imported products will not be the only ones increasing. Domestic companies in the hardware, electronics and clothing industries will face challenges as the costs of goods needed to create their products increase. These challenges will force them to increase prices, leaving consumers with few options to save money.
The United States-Mexico-Canada Agreement (USMCA) was signed by Trump in 2018, along with then-Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau. Notably, it is an updated version of the North American Free Trade Agreement (NAFTA). The most significant element of this agreement is that it virtually removed tariffs on all products imported from all three countries.
This agreement has been wildly successful and mutually beneficial, creating more jobs and higher labor standards and boosting the North American economy. If Trump imposes tariffs on Mexico and Canada, it will violate this existing agreement, which has already prompted threats of retaliation from the two countries.
As a result, prices will likely dramatically increase on goods previously circulated freely. While Trump argues that these tariffs are meant to pressure the countries to crack down on illegal drugs and immigration, the collateral effects of his goals will be destructive.
Fortunately, now that Trump has announced his plans to impose tariffs, companies and countries can begin to prepare for the consequences. However, this begs an important question: Will these preparations be enough? Even more pressing, what will this mean for U.S. citizens and their wallets going forward? Right now, it’s incredibly difficult to predict — only time will tell.