For those of you unaware, a tariff is a duty or tax set by a country on the products and services imported from another country. There are four main reasons why a country decides to impose tariffs.
- To safeguard newly set up domestic industries against foreign alternatives
- To prevent aging and ineffective domestic industries from becoming irrelevant due to the demand for foreign alternatives
- To maximize revenue
- To foil any “dumping” plans crafted by foreign industries.
But this indicates that tariffs, or even high tariffs, are good for the economy, right? However, that’s not the case at all. In fact, high tariffs have proven to be harmful to the US economy. Let’s discuss how high tariffs have damaged the US economy.
How did high tariffs damage the US economy?
It’s a general belief shared by many economists that economic output benefits from free trade and obstacles in free trade’s path might hinder economic growth. If history is to be reviewed, then it’s clear that high tariffs result in an increase in the prices and in a decrease in the number of products and services for US citizens. This, consequently, impacts economic growth in a negative way.
There are a couple of ways in which high tariffs could hinder the economy. For starters, the said tariff may be demanded from the manufacturers/producers of the products/services in question in the form of increased prices. The consumer of that particular product or service could also be charged that tariff in the form of an added price to their purchase.
Moreover, tariffs could directly boost the cost of parts and materials. This would automatically result in an increase in the prices of products comprising these parts. This method would lower capital and labor income.
Since these expensive goods and services would adversely affect the return to capital and labor, which would make the US citizens invest less, resulting in a decline in the output.
Yes, it can be argued that the value of the US dollar may increase as a result of high tariffs. But it should also be noted that the more expensive the dollar gets, the more difficult it would get for exporters to offer their services and sell their products on a global scale. Since the exporters wouldn’t be able to generate higher revenues, it would result in the economy taking a direct hit.
It was predicted a couple of months ago that the tariffs imposed during the Trump administration, coupled with how the US’ trading partners would respond to it, would not only damage the economy but also the employment rate and income.
As of September 2020, a whopping sum of $80 billion (in the form of new taxes) was imposed on Americans in the wake of tariffs being levied on uncountable products and services. What’s concerning is the fact that it became one of the largest tax increases in nearly 80 years.
It was estimated that the tariffs imposed by the Trump administration would hinder GDP by as much as 0.23% in the long haul. Moreover, the wages would be reduced by 0.15% and over 179,800 full-time jobs would go away.
Additionally, if the Trump administration would have had its way and imposed extra tariffs (that it threatened to), the GDP would have witnessed a further fall of 0.24%, resulting in the lowering of wages by an extra 0.17% and removal of over 184,000 jobs.
In short, the economic disasters that could come due to these tariffs and the retaliatory actions taken against the US by different countries are strong enough to set back the US’ projected economic gains (from the Tax Cuts and Jobs Act) by at least a third.
While free trade can benefit the economy in more than one way, the application of tariffs is understandable. If imposed reasonably, tariffs could do a lot of good for the domestic industries. However, when the tariffs become unreasonable, the economy starts suffering. Even if the effects aren’t visible immediately, they would surface eventually.