The Costs of Tariffs

Michael Froman is president of the Council on Foreign Relations.

Over the weekend, President Donald Trump announced that the United States was going to impose 25 percent tariffs on goods from its two neighbors, Canada and Mexico, and 10 percent tariffs on all goods from China. Economists predicted chaos. Investors braced for impact. Trading partners scrambled to respond.

By the end of the workday on Monday, Canada and Mexico had managed to secure a thirty-day delay by pledging to ramp up their efforts to prevent the flow of migrants and drugs through their borders. But at midnight on Tuesday, the tariffs against China took effect, with Trump calling them merely an “opening salvo.” For now, the market’s reaction has been relatively muted. 

The tariffs should come as no surprise: Trump was acting on a deeply held belief and fulfilling a key campaign promise. But what’s less clear is what Trump was hoping to get out of this tariff play. The president seems to have multiple goals in mind. Whether he will succeed depends on which he prioritizes. 

One purpose seems to be to extract concessions in negotiations over a range of non-trade issues, from migration to drugs. The announcement of tariffs did immediately bring the Canadian and Mexican governments to the table, and the White House has made much of the changes they unveiled in response.

Canadian Prime Minister Justin Trudeau announced the appointment of a “fentanyl czar” and reiterated his prior commitment to spend hundreds of millions of dollars more on border security. Mexican President Claudia Sheinbaum promised to send ten thousand National Guard soldiers to the U.S. border, joining the more than ten thousand troops already there.

Trump also hopes that tariffs will bring production back home and eliminate bilateral trade deficits. In remarks delivered by video to Davos, he exhorted foreign companies to shift their production to the United States. “Come make your product in America, and we will give you among the lowest taxes of any nation on Earth,” he said. “But if you don’t make your product in America, which is your prerogative, then, very simply, you will have to pay a tariff.”

Onshoring production is a long-term project. It takes time to reorder supply chains and invest in new factories. Doing so would almost certainly raise the costs of production, making the goods less competitive and more expensive for consumers and end users. In some cases, onshoring is simply infeasible. Is the United States suddenly going to turn over vast amounts of land to grow all the tomatoes and avocados now imported from Mexico? If so, who is going to harvest them if Trump deports migrant workers?

Revenue seems to be another goal, with the president suggesting that tariffs might replace the federal income tax. As he explained in his inaugural address in January, “Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens.” In his address to the Davos crowd, he claimed that tariffs would “direct hundreds of billions of dollars and even trillions of dollars into our Treasury.” Trump has proposed creating an “external revenue service” to collect the money.

Trump is almost certain to be disappointed on this front: 92 percent of the tariffs collected during his first term went to compensate American farmers for the cost of other countries’ retaliation, netting very little for the U.S. Treasury. Moreover, if tariffs work in reducing imports and promoting American production, there should be little revenue to collect.

The best evidence suggests that tariffs are paid largely by domestic consumers and manufacturers, not foreign producers. They effectively act as a tax on Americans, and a particularly regressive one at that, given that the lower a household’s income, the greater a proportion of its income it spends on imported household goods.

Trump has always resisted that characterization. So what was notable about a message he posted to his social media platform on Sunday was that—for the first time, so far as I can tell—he admitted that tariffs might impose costs on Americans. “WILL THERE BE SOME PAIN?” he asked on Truth Social. “YES, MAYBE (AND MAYBE NOT!)”

Indeed, there are three categories of costs that protectionist measures carry. The first is the cost of implementation. If tariffs are imposed on the more than $75 billion worth of agricultural products that the United States imports annually from Canada and Mexico, grocery stores, which operate on narrow profit margins, are going to pass that on to consumers. The price of Alberta beef and Michoacán avocados will go up.

The second is the cost of retaliation. Even as they attempted to negotiate a last-minute deal with Trump, Canada and Mexico had already prepared retaliatory measures. Canada published its list, which included goods from Republican-leaning states, such as Florida-grown oranges and Ohio-made appliances.

On Tuesday, China hit back with a barrage of measures of its own, announcing 15 percent and 10 percent tariffs on a range of goods, tighter export restrictions on key minerals, and an anti-monopoly investigation into Google. If Beijing’s tariffs take effect, as they are scheduled to do on February 10, then American companies will find it more difficult to export coal, oil, liquified natural gas, agricultural machinery, and pick-up trucks to China.

The final category of costs is perhaps the most corrosive: the cost of imitation, which arises when other countries follow the United States’ example in imposing their own tariffs and selectively adhering to the rules. When the architect of the rules-based economic order begins to pick and choose which rules to follow, other countries will have greater cause to follow suit. That, in turn, can cause direct problems for the United States down the road.

As CFR Senior Fellow Benn Steil has noted, since the first Trump administration used the national security exception to impose tariffs on Canadian and European steel and aluminum (an exception that had previously been invoked only rarely), other countries have increasingly cited national security as an excuse to tariff everything from alcoholic beverages to animal feed to door frames. Now, there are more than ninety barriers to trade based on the national security rationale.

Trump’s recent recognition that tariffs can cause pain is an important step in addressing the question of how much American consumers, workers, farmers, and ranchers are willing to pay for the chance to accomplish the tariffs’ goals. Prices will go up, growth will slow, and jobs could be lost. Conceivably, Americans are willing to pay something. If tariffs become the go-to tool, we will learn how much pain the public can stomach.

Of course, it’s also possible that few, if any, tariffs will ultimately be imposed. Trump seems quite comfortable pursuing an on-again, off-again approach to tariffs to gain the attention of foreign leaders and instill fear in the rest of the world—an economic version of the “madman” theory associated with President Richard Nixon. This might well work in the short run.

But if he keeps issuing threats, only to backtrack, the president might find that other countries are starting to take him less seriously as a leader and see the United States as less reliable as an ally. At a time when China is wooing other countries by positioning itself as the defender of globalization, multilateralism, and the rules-based system, America’s relative position as a global leader might well slip.