COVER STORY
Issues about US tariffs
They are large The scale of the Trump administration’s tariffs launched on “Liberation Day” are huge – the highest US trade barriers since Smoot-Hawley in 1930. 1
The importer pays Tariffs are a tax levied on goods that cross the border. Although the importer pays, who bears the ultimate cost is more complicated. 2
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High tariffs undermine sentiment Higher import prices raise production costs for domestic firms, offsetting the increased output of those that benefit from protection. Higher costs for shoppers reduce their real incomes and hence their spending power. This effect already seems visible in a plunge in US consumer sentiment. 4
Initial small net effect If imposed at the current levels, US tariffs could raise around
US$600 billion for the US Treasury. However, this is less than one third of the expected US$1,865 billion US federal government deficit in 2025.
Tariffs do not resolve fiscal pressures, which are a much larger problem.
Dual interest rate effect The damaging effects of tariffs on the supply capacity of the US economy puts upward pressure on US interest rates (which set lending rates globally). At the same time, rising investor uncertainty stemming from President Trump’s actions lowers investment decisions and imparts downward pressure on rates through lower credit demand. 7
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Inflationary impact #2 Following the COVID-19 pandemic-related rise in prices, a tariff induced price increase would lead to further, higher wage demands and second- round effects. 6
Inflationary impact #1 US goods imports account for
approximately 10 percent of GDP. An average 10 percentage point increase in tariffs is likely to raise consumer prices by around 1 percentage point, according to the Federal Reserve Bank of Boston, adding further pressure
onto the Federal Reserve’s 2 percent inflation target.
Tariffs are not the solution #2 The USA has a trade deficit because it persistently consumes more than it produces at full employment. To cut the deficit requires efforts to generate a recession, which would reduce demand for imports – but this is politically unrealistic. 9
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Tariffs are not the solution #1 The USA is a very closed economy: total goods trade was 19 percent of GDP in 2023, compared with 53 percent in Canada. This is despite President Trump’s rhetoric that imports are destroying US jobs and “killing America.”
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Illustration: Antonov Maxim/Shutterstock; javieruiz/Adobestock
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