In a Q&A, Brown University Professor of Economics Şebnem Kalemli-Özcan discussed how the new presidential administration's planned tariffs could potentially impact the U.S. economy.
PROVIDENCE, R.I. [Brown University] - On the presidential campaign trail last fall, Donald Trump described tariff as the "most beautiful word in the dictionary" and recently announced that tariffs on America's three largest trading partners are soon set to take effect.
Brown University Professor of Economics Şebnem Kalemli-Özcan has a different point of view.
"For many economists, tariff is actually the worst word in the dictionary," Kalemli-Özcan said.
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She argues that the administration's planned tariffs on various goods from Mexico, Canada and China are likely to harm the U.S. economy.
In a Q&A, she shared her perspective on tariffs.
Q: What's a simple definition of a tariff?
You can think of it like a tax, but it's placed on a good or on a country instead of on an individual. Governments can levy them on exports, which are the goods the United States sells to other countries, or on imports, which are the goods the United States buys from other countries. When the U.S. levies a tariff on an imported good, the company importing the good pays the tariff, which can be a percentage of the good's cost or a fixed amount per item.
Q: Who typically absorbs the cost when a tariff is imposed by the U.S. government on something imported from another country?
Research has shown that consumers ultimately pay. Economists don't typically agree on all things, but if you ask me, "What is one thing they do agree on?", it's that tariffs are costly to the American consumer in the end. If the Trump administration moves forward with the tariffs it has planned, I believe that American consumers will pay the price, and they are also going to hurt American businesses. When a good is more expensive for a company to buy, the company is going to sell it for more to the consumer, so the consumer will have to either pay that higher price, or say, "I'm not going to buy that" - or if it's available, go to an alternative that is made in America, which will also put upward pressure on the prices of those domestic goods.
Q: Do tariffs have any benefits, like promoting the sale of U.S.-made goods?
In terms of economics, imposing tariffs on the goods the United States is buying is not going to benefit anybody in the United States unless at the same time the country enacts some sort of industrial policy to promote manufacturing in America. Americans usually buy foreign goods either because they're cheaper or they're of better quality than a version made here. If you were to make all of these foreign goods more expensive for all Americans but you don't want to hurt Americans, you'd have to use the revenue generated from the tariff to subsidize a lot of American companies making the exact same thing. This tariff revenue will not be enough for that. Also, this would have to happen right away, and you'd have to make sure that the American product is the same quality or better than the foreign-made good and still offered at a low cost to consumers. It's unlikely that the government would be able to do this immediately and for so many types of goods, which is why I'm concerned about the inflationary and recessionary impact. Tariffs also lead to appreciation of the dollar, meaning it will be hard for U.S. exporters to sell their goods to other countries, even in the absence of any retaliation from any country that we impose tariffs on.
Q: Can you provide any insight on how some of the tariffs on specific countries might affect the economy, like 25% tariffs on imports from Canada and Mexico?
A tariff of 25% or higher is huge. Implementing this on Canadian and Mexican goods would affect almost every sector in America because the three countries have a very integrated trade partnership. America is a trade-deficit country, meaning we import more than we export. If you make most of our goods we consume much more expensive, that will likely make consumers decrease their spending, and then producers would decrease their investment and this will likely lead to a decline in jobs.
The research I lead at Brown's Global Linkages Lab shows that the planned tariffs - if 25% or higher and on several sets of countries and goods - would be inflationary and would also increase unemployment, at least in the short term. That's a recession. If you create a complete halt in the international trade with your major trading partners, it's basically making the economy have a heart attack. With this tariff on Mexico, I think about agricultural products, for example. We will see an immediate effect on prices for things like avocados and other fruits and vegetables in the supermarket.
Q: What is your analysis of the 10% tariff on Chinese imports?
Originally, the proposed tariff on China was 60%. I think the administration realized that would be an impossible thing because that high of a tariff would completely stop all trade between the U.S. and China, which wouldn't just mean higher prices for consumers but a COVID pandemic-level supply chain interruption. I don't think a 10% tariff would affect the economy much overall, but it would still raise prices for consumers.
Q: Tariffs are not new. What's different about the current administration's approach?
With the Smoot-Hawley Tariff Act of 1930, Congress enacted tariffs meant to protect U.S. businesses from foreign competition, but after World War II and as our economy increasingly became more globalized, they largely fell out of favor. More recently, Trump implemented $300 billion in tariffs on Chinese-made products the first time he was in office, and the Biden administration increased some of those, including tariffs on electric vehicles, to protect that sector of the American economy. Sometimes tariffs, like those on semiconductor chips, are imposed primarily for national security reasons. But in recent months, Trump seems to be using sweeping threats of tariffs as more of a political tool against other countries.
Q: Can consumers do anything do prepare for these tariffs?
Unfortunately, no. They either have to get ready to buy things more expensively, look for alternatives, or decrease their consumption, which will lead to a slowing economy.
