Donald Trump loves tariffs. He has even said it is “the most beautiful word.” He used tariffs pretty effectively in his first term, primarily as a negotiating tool. He has really ramped up his use of tariffs and his rhetoric surrounding them during the first 100 days of his second term. As would be expected, his supporters love it and his detractors are freaking out. Let’s look at tariffs, their purpose and when they are beneficial and not so much.
First, tariffs are a tax. They do add money to the government’s coffers. However, there is a ripple effect as organizations don’t just absorb taxes. Just as the left is wrong when they assume raising taxes on the wealthy and on corporations doesn’t impact the poor, the right is wrong when they think tariffs that are being paid by foreign companies or governments don’t impact the poor. A tax is just another business expense and no matter if you are selling oil, computers or stuffed animals, you are going to set your prices so as to cover expenses and your profit margin. This means that tariffs are inflationary, just like many other tax increases.
One argument that Trump supporters make is that there was no inflation associated with Trump tariffs during his first term. That is true – but the world economy was in a different place pre-COVID. As a result of government over-stimulation and the disruption of certain supply chains, we saw a quick ramp up of inflation in 2021. Even though it has eased since, there are still some lingering inflationary pressures – egg shortages due to avian flu are the most talked about. The size and scope of the 2025 tariffs are certainly going to be a contributor to those pressures, if sustained at the high levels currently proposed.
Another pro-tariff argument is that it protects domestic manufacturers from unfair competition. This is certainly consistent with Trump’s America-first agenda. One problem, however, is that Trump’s desire to bring manufacturing to the U.S. and his immigration policy are misaligned. Our population demographics don’t work for a resurgence of American manufacturing like we saw between the end of World War I and the 1960s if you slow down or eliminate the flow of immigrants from the south. It’s one thing to bring the manufacture of complex computer chips from Taiwan to Arizona, but something else to bring back the manufacture of tee shirts and socks. There’s simply no way Americans can compete with Vietnam and other places. And tariffs simply raise the price of these essentials. We are used to going to Walmart, Target or Costco and purchasing these types of goods at such low prices that the reality of Trump’s tariff policy will be surprising to many of his followers, just as the price of eggs (through no fault of Biden or Trump) continue to be much higher than we were used to.
In summary, tariffs are neither beautiful nor ugly in toto. Tariffs or the threat of tariffs can be an effective negotiating tool and if implemented selectively, can protect domestic producers. But if implemented simply as a show of power, particularly when targeting our two largest trade partners – Mexico and Canada – for reasons that are not clear, they seem to be haphazard. And they create trade wars when perhaps none were needed. I get that Trump believes that some of the Free Trade Agreements were unfair to the U.S., but I’m, gonna miss having access to inexpensive apparel if those days are over.
One last thought. Do you find it as hilarious as I do that all those people who were early adopters of hybrids and later EVs, especially the really smug ones (South Park episode from 2006), are now anti-Tesla because of Elon Musk’s association with Donald Trump? While at the same time MAGA supporters are now buying Teslas when they wouldn’t have been caught dead driving an EV just a couple of years ago? Human behavior can certainly be strange.