Throughout his 2024 presidential campaign to take back the White House, President Donald Trump outlined how tariffs would be used in his economic goals as well as his political ones. While on the campaign trail, Trump promised to put 60% tariffs on goods being imported from China, and 10% tariffs on goods from all other foreign countries.
Since taking office Jan. 20, Trump has imposed a 25% tariff on Mexico and Canada for what he says is their failure in maintaining their borders. He also imposed a 10% tariff on goods imported from China. On Feb. 3, Trump and the leaders of Mexico and Canada reached an agreement to pause tariffs for 30 days.
Elon professor Brandon Sheridan has provided an insight on how tariffs affect consumers and the price of their goods, how tariffs have been used in the past and how retaliatory tariffs may affect consumers. According to Sheridan, consumers, not foreign countries, pay for the expenses tariffs put on their goods.
The length of this interview has been shortened for space.
What are tariffs and why should consumers care about them?
A tariff is really just a tax on goods coming in across the border from other countries. The impact to consumers is the same as any other tax, it raises the prices of the goods that they buy.
How do tariffs affect prices for businesses who import goods and consumers who buy those goods?
In the same way, anybody that uses an imported product is going to face and going to feel the effect of the higher price. So lots of businesses, for example, might use steel as an input to their production process. Let's say, if you're manufacturing cars, they're going to have to pay more for that steel. They're going to have to charge more for that car to consumers to cover the cost of the steel. It's going to raise the price for everybody all the way down the line.
How have tariffs been used in the past by the U.S. government?
Back before the United States had a developed income tax system, tariff revenues were used to fund a lot of the government. Once we shifted to income tax, and now we have sales taxes in the states, a lot of state operations are run from those, and so we don't really use it as something to generate revenue anymore. More in the past, they've been used more like a political football, so a point of negotiation. Some of that is valid, some of that is, national security concerns. So for example, if semiconductor chips are vital to a lot of the products that we use, if you use a car, computer, etc., a phone, and so if the supply of those semiconductor chips was suddenly interrupted, that would be very problematic for the US economy to run. So you may have a national interest in ensuring that you can have domestic production of that. And so you might want to heavily subsidize domestic production. And you might also want to put really high tariffs to discourage people from buying it from other countries. That would be sort of another explanation for how it's been used in the past.
How is Trump using tariffs now that are different from previous administrations?
President Trump has been using tariffs, I would say, unwisely. And I think he's been using them haphazardly, it's odd how he's using them, if I could say that, because you're using them on countries that we already have tariff agreements. We have free trade agreements with lots of countries, including Canada, Mexico, and so he's using, in some cases, the sort of the premise of national security to just put tariffs on everything. So he's using it as a negotiating tool on all sorts of things. And that is not, not really something that past administrations have wanted to do. For example, if you wanted to talk about border crossings and things like that, you have diplomats that could discuss specifics of those. But for everything that he wants to get done, he seems to be using tariffs as well: If you don't do this, then we're going to put tariffs on you. And that is not something that past U.S. administrations have done, or even administrations from other advanced countries have done.
How might uncertainty around American tariffs cause problems within the global business world?
We’re already starting to see some of that. I know there’s a couple different measures of economic policy uncertainty, both within the U.S. and globally, and those are reaching some of their highest levels ever in the past several weeks. So one of the worst things that a business can have is uncertainty, because it delays plans. And when you delay plans, you may hire fewer people, or even fire some people. You delay expansion plans, you might miss opportunities that you otherwise would have had. So the Trump administration in 2018 also had some tariff trade wars and some estimates are that the uncertainty alone may have cost the U.S. something like 1% of GDP. Today in a $30 trillion economy, that’s like $300 billion just because we’re tossing around this political football. From an economics standpoint, it’s not a very wise thing to do, but that’s sort of the path they’ve taken. It substantially raises uncertainty and causes a lot of anxiety for businesses.
What are retaliatory tariffs? What would the effect of retaliatory tariffs be on American consumers?
Retaliatory tariffs are when the U.S. places a tariff on, say, Canada, Canada gets mad, they place a tariff on some U.S. product. And so the idea is that you go sort of back and forth and put tariffs on things that you think strategically might apply political pressure. So some foreign countries were saying they were going to specifically look to apply tariffs on important products from states that leaned Republican because they thought they could pressure the President a little bit more. For example, you might put high tariffs on bourbon from Kentucky, or on corn from Iowa, or something like that. That’s been the tactic in the past. And so what that does is it hurts our producers, because it's harder for them to compete, because they have to compete with maybe lower priced producers abroad. But it also could permanently shift, if the uncertainty becomes the norm, then people that previously were buying, let's say, soybeans from the US decide what the US is not worth dealing with. There's so much uncertainty and chaos, we're just going to go with a different supplier altogether. We're not even going to entertain going back to American farmers. Something that you thought may have taken, like, a few months, to hammer out whatever political issue you have, and then you take the tariffs off, the other countries at this point have moved on, and so now they're not even going to entertain it, even if there aren't tariffs on it. So you could permanently damage these businesses. It's not necessarily just a temporary thing.