Why Tariffs Aren’t a Good Idea
Tariffs are taxes on consumers. They raise costs and cost jobs.
I hate to talk politics.
If you’ve read my prior work, then you’ll know that I emphasize what “is” (called positive economics), rather than what “should be (called normative economics).”
But the on again, off again new tariff policy has me deeply concerned.
But you’ve been asking for my take on tariff policy.
Like most economists, I preach free trade.
The main benefit is that we can get more stuff for less money. This leaves us with more money to buy more expensive American goods and services.
In some circumstances tariffs make sense. I looked at those in the last post.
In this post, I’ll look at the reasons that tariffs aren’t good for the economy or for our standing in the global economy.
Penalizes poor countries
The new tariff policy levies large tariffs against poor countries that export more to the US than they import. They don’t import much from us because they can’t afford to.
For example, the small African nation of Lesotho faces higher tariffs than its competitors. Lesotho is a poor country that relies on US imports for its diamonds and textiles.
Hits lower- and middle-income Americans harder
Lower- and middle-income Americans bear much of the cost of tariffs. The new policy increases the prices of shoes and clothing. Just as with inflation, poorer households don’t have many choices to escape higher prices. If you’re already buying the cheapest brands, it’s hard to find substitutes.
Negative impact on diplomacy
The uncertainty surrounding current tariff policy leaves other nations unsure how to do business with companies in the US.
Diplomatic relations suffer.
Our exports may suffer overall, as other countries pull away from doing business with us.
Negative effect on employment
If our exporting industries have trouble selling to other countries, then employment will fall. And we’re ignoring the positive effect on employment that imported goods have.
Retailers large and small rely on imported goods to stock small electronics, like phones and Christmas decorations, and certain foods, like avocados and water chestnuts.
If we increase the costs, then these retailers will lose sales, which means they’ll cut jobs.
In addition, industries facing tariffs will see higher costs. They may reduce employment to compensate.
Costly and complex
Tariffs are best in specific situations. For example, the tariffs on silica I mentioned in the earlier post were tied to unfair pricing practices by the Chinese.
Applying tariffs differently on various products and different nations leads to increased costs of importing and exporting.
For example, the extra paperwork and fees that came into play when the UK left the EU were large.
For Samways, a company that exports fish to the EU, the costs of getting one truckload of fish to France went up. [1] Starting the truck cost an extra 27 pages of paperwork and five hours of administrative time.
The company had to hire another staff member which cost them £30,000–40,000 ($39,600–$52,800) a year. The company also had to pay £51,000 ($67,320) for the right to pass through the port each year. [2]
We can expect to see similar cost increases, especially for cars and housing.
Won’t earn enough income to replace income taxes or fix the trade deficit
There are some who give economists grief for our “unrealistic assumptions” about human behavior.
Fair enough.
We assume that with enough people in a sample, behavior tends to average out.
But the assumptions made to justify the size of the tariffs are extreme. Their ability to raise enough money to reduce income taxes and eliminate the trade deficit are faulty.
The main assumption is that the tariff will fall mostly on the importing country.
This is unlikely. Tariffs most impact American consumers, both directly and indirectly, because they increase prices.
The direct impact might be small. For example, the tariff on a pair of sneakers made in Vietnam will only cause the price to rise by a small amount, since most of the cost comes from warehousing, distribution, and sales markups at the store.
They also change the choices that consumers make.
The indirect impact, however, can be very large. This is especially true if you’re in the market for a new home. Industry analysts say that the tariffs on steel and lumber could increase the price of new home construction by $9000 a unit.
Since housing prices are keeping new home buyers out of the market, this is poor timing. One impact I’m already seeing outside of Atlanta is an emphasis on shared walls. More townhomes are going up everyday.
According to the Census Bureau, single-family home starts are down from a year ago, but multi-family home starts, including apartments, are up.
May reduce innovation here
For example, the US has a ban on electronic vehicles (EVs) from China. This is meant to protect our EV industry from the subsidies the Chinese government gives. The ban only keeps Americans from buying their Evs. They’ve found buyers in other markets.
The ban may limit the willingness of US manufacturers to find ways to produce cheaper EVs. We went through this in the early 1980s with Japanese cars that got much better gas mileage. The Japanese agreed to voluntary export controls (quotas). It took years for US manufacturers to catch up.
As always, thank you for reading. I look forward to reading your comments and questions.
Nikki
PS: Thank you for your patience as I thought through this article.
Resources:
https://www.epi.org/publication/tariffs-everything-you-need-to-know-but-were-afraid-to-ask/
https://www.taipeitimes.com/News/biz/archives/2022/04/22/2003776996
https://apnews.com/article/trump-tariffs-africa-trade-lesotho-6c897b1c548bfe783564b6db3f08393c
[1] 71 pages for 1 lorry of fish. BBC.com, https://www.bbc.com/news/business-55887043
[2] These numbers are from April 14, 2025.