What do you need to know about tariffs?
On April 2, 2025, President Donald Trump announced a sweeping set of tariffs on 185 countries that will make the effective tariff rate in the US higher than it has been in over 100 years. The media, politicians, and social media have been filled with information, hot takes, and talking points about tariffs. Much of this information is misleading, politically biased, or blatantly false. This post will dive into the nuances of tariffs: how they work, when they can be effective, and what we can expect from the new tariff announcements.
What is a tariff?
A tariff is a tax the US imposes on products imported from another country.
How do tariffs work?
When a company in the US buys a product from another country that is subject to a tariff, the company must pay the tax to US Customs and Border Protection before it can be released.
For example, in 2018 the Trump administration placed a 30% tariff on solar panels produced outside the US. If a US company buys a solar panel from Korea for $1,000, then it must pay $300 to US Customs for the tariff. Typically, that $300 the US company pays is passed along to consumers by a price increase.
When are tariffs a good policy?
A tariff makes foreign products more expensive and, therefore, it may increase the likelihood that people and companies will buy domestic-made products instead of foreign-made products. Historically, tariffs have been effective when used in developing countries where an industry is new and not ready to compete with developed countries. By imposing tariffs, it gives time for a new industry to grow and eventually compete with industries in developed countries.
Another effective use of tariffs is to protect industries essential to national security. For example, the global semiconductor supply chain was significantly impacted during the COVID-19 pandemic, and many of the products we buy – such as cars, smartphones, medical devices, and computers – rely on semiconductors. Not having semiconductor production in the US became a threat to national security, so the Biden administration placed large tariffs on Chinese-made electric vehicles and semiconductors, and in 2022, President Biden signed the CHIPS and Science Act to boost domestic research, development, and production of semiconductors and strengthen domestic supply chains.
Tariffs can also effectively protect US consumers and workers from unfair labor practices, such as those of countries using child or forced labor.
What is the purpose of the new tariffs?
The Trump administration has given several reasons for the new tariffs being imposed, including bringing back manufacturing jobs, increasing revenue to the government, reducing trade deficits, and increasing bargaining power with other countries.
Over the last several decades, the US has seen many manufacturing jobs move to other countries. During this time, the US workforce has become more educated, skilled, and productive, which has led to higher wages. As a result, companies have closed manufacturing plants and relocated them to other countries such as China, Taiwan, Vietnam, and Mexico, where they can produce products cheaper, and then the US can import them. Since 1980, there has been around a 30% reduction in the number of manufacturing jobs in the US.
It is devastating in communities where manufacturing jobs are lost. As such, there are incentives for members of Congress who represent those communities to support protectionary tariffs in an attempt to preserve those jobs.
However, most economists generally oppose tariffs because they raise prices and decrease the quantity of products produced, making people in both countries worse off. Despite the loss in manufacturing jobs, the total number of jobs in the US has not declined over the last several decades as there has been robust service-providing job growth.
Post-WWII, global supply chains have become very complex, with most products being made in multiple countries, as each country looks to specialize in the production of goods. These new tariffs are unlikely to bring manufacturing jobs back to the US in the short- or medium-term, as this would require years of planning and reorganization of the international supply chain.
With these new tariffs, foreign countries will respond by imposing retaliatory tariffs on the US, which further exasperates the problem. At the end of the day, tariffs cause people in both countries to suffer, and the companies that the tariff was designed to protect end up still being hurt.
What can we expect from the new Trump tariffs?
To provide some historical examples, in June 1930, the Smoot-Hawley Tariff Act was signed into law, which was intended to protect domestic industries during the Great Depression. However, this prompted retaliatory tariffs, which drastically decreased US exports and ultimately made the Great Depression worse.
In January 2018, Trump placed a 20-50% tariff on washing machines. Before those tariffs, the price of washing machines had been declining for several years. While those tariffs were in effect, the price of washing machines steadily increased until those tariffs expired in February 2023, when the price immediately decreased.
The tariffs Trump just imposed will make the current effective tariff rate the highest in more than 100 years. Given the breadth of these tariffs and the historical precedent, we should anticipate a negative impact on the economy with increased prices and job losses, as has already been seen at five automobile manufacturing plants. We should expect that other countries will place reciprocal tariffs on the US, like China recently placing a 34% tariff on US goods, similar to what we saw during the 1930s. These tariffs are likely to decrease both imports and exports, which will be bad for the economy in general. The Budget Lab at Yale University estimates prices will increase by 2.3% (an average of $3,800 per household) with clothes and textiles having the largest price increase of 17%. They predict that Trump’s tariffs will cause a 0.9% decrease in GDP in 2025, while the US economy will persistently be 0.4-0.6% smaller. While these tariffs may increase some revenue to the government, tariffs are complex, place a logistical burden on US companies, and will only decrease efficiency in the economy.
Why should we encourage free trade?
The initial impact of a plant closure can be hard on local economies and families, and it can make calls for tariffs to protect these jobs attractive. However, the long-term benefits of free trade outweigh the short-term costs. With free trade, US consumers will have a wider variety of products to buy, and they will be cheaper. There is often a fear that losing an industry will mean fewer jobs. However, as we saw earlier, the number of service-providing jobs has been steadily increasing since 1950, and in March 2025, 60% of the US working-age population is employed (which is right around the average of the last 70 years). When industries leave the US, new industries arise to take their place. The start-up, technology, and healthcare sectors in the US are large and growing. We should encourage innovation and new sectors to grow and become the backbone of the 21st century American economy instead of trying to cling to the economy of the 20th century.
As we encourage free trade and the creation of new industries, we should not ignore the pain and issues that impact workers and families in communities that suffer job losses. Workers who lose their jobs may lack the skills needed to find a job in these new sectors. They may also be stuck in a location where these jobs are not available. Moving is expensive, and it can be difficult to sell your home in an area with a deprived job market. These are two main issues that negatively impact communities when industries leave due to free trade policies. Historically, the US has not done enough to recognize this and that has led to anger and discontent from people living in areas that are most impacted by job losses. However, if we are proactive in recognizing these issues, they can be solved with proper policy. Promoting and subsidizing job and skill training programs at community colleges can allow workers who lose their jobs to acquire the skills needed for a different industry. Providing subsidies or incentives that make moving easier and cheaper for an unemployed worker can alleviate the financial pain and stress of moving. These are just some examples; there are government- and market-based policies that can be debated, discussed, and implemented that promote the benefits of free trade and provide support to communities that are negatively affected by job losses. While change can be unsettling, fear of changes in the future is not a good reason to impose tariffs to try to bring back an economy from the 20th century. Tariffs are not the solution to a robust and growing economy; they are the opposite.
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