What tariffs do and why economists don’t like them

“The most beautiful word in the dictionary is tariff,” former President Donald Trump told the Economic Club of Chicago last week. “It’s my favorite word.”

The Republican candidate for president has spent the past few weeks floating ever higher proposals for raising surcharges on foreign goods entering the United States. He has called for a 20% blanket tariff on all imports, tariffs of at least 60% on products from China, 100% tariffs on nations that shift away from trading with the dollar, and a 2,000% tariff on vehicles built in Mexico.

Economists across the political spectrum oppose these ideas, saying the most likely outcome would be higher prices for consumers. Here’s a look at how tariffs work and why they’re so critical in an election in which living costs are front and center.

What tariffs do and who pays them

Tariffs, also known as duties or levies, are deterrents. They penalize domestic firms that import foreign-made goods to encourage companies to source more of those items within the country. When a tariff is placed on a product — be it a watermelon, a washing machine or a high-tech component — any U.S.-based company that imports it must pay a percentage of that item’s price to the government, with federal officials setting the rate.

Trump has said the revenue from these payments would be huge. He proposes using it to fund everything from tax cuts to subsidized child care. In a rambling response to a question about the latter issue last month, he said “those numbers” from tariff revenue “are so much bigger than any numbers that we’re talking about, including child care” costs.

But any business facing a tariff has two options: either stop importing the targeted product and buy it domestically instead, or raise its sale price. When firms can’t find the goods they need within U.S. borders at prices they can afford, or at all, they tend to pass some or all of the cost of the tariff to consumers.

For that reason, Vice President Kamala Harris has called Trump’s tariff proposals “a sales tax on the American people” that she says would raise costs for households by $4,000 each year. Adam Hersh, a senior economist at EPI Action, the advocacy arm of the left-leaning Economic Policy Institute, puts that estimate lower but still in the four-figure range at $2,500 to 3,000 per year.

“Donald Trump will not just impose a $4,000 a year middle class tax hike — his plan will permanently jack up inflation, crush American manufacturing jobs, and hurt manufacturing workers more than any other sector,” Joseph Costello, a Harris campaign spokesperson, said in a statement. “Over and over, independent economists are warning of the economic dangers of Trump’s plan, and Americans should take note.”

The Trump campaign didn’t respond to a request for comment.

Whatever the ultimate cost, many economists agree that higher, more widespread tariffs would drive up prices for consumers.

“She’s right that his tariffs are like a sales tax, in the sense that consumers everywhere are going to end up paying,” Alan Deardorff, an economist at the University of Michigan who specializes in international trade, said of Harris’ claim. But he cautioned that only fully imported products would likely increase by the same rate as the tariff itself; the costs of goods assembled in the U.S. from a mix of imported and domestic parts, such as cars and airplanes, would likely rise by less.

While tariffs are broadly disliked by economists, they now draw more bipartisan support than they have in decades. There’s agreement in both parties that endlessly lowering barriers to global trade has had detrimental economic and social consequences.

Some farmers and factory owners complained during the Trump administration that its tariffs were hurting their bottom lines, leading the White House to funnel tens of billions of dollars in subsidies to agricultural producers. But the Biden-Harris administration largely hasn’t reversed course. It extended about $300 billion in its predecessor’s duties on Chinese goods, and even added additional tariffs on $18 million worth of Chinese goods in strategic industries, including electric vehicles, semiconductors, steel and aluminum.

The impact on prices and jobs

Trump and his allies who endorse his trade policies argue that tariffs protect and bolster domestic markets, spurring homegrown producers to expand. They also see them as an economic weapon. Trump recently threatened the Illinois-based tractor maker John Deere with a 200% tariff if it moves production to Mexico.

Some economists had long theorized that if the U.S. imposed tariffs on a product, foreign producers would lower their prices to avoid being pushed out of the large, lucrative American market. Tariffs had been falling around the world for decades before the Trump administration rolled out its 2018 levies, which created a natural experiment to test that thesis.

In the years since, Deardorff said, “you can’t find anything in the data indicating that the foreign prices went down.”

Even if tariffs do force some overseas producers to lower prices, U.S. consumers wouldn’t necessarily reap the benefits, said Monica Morlacco, an economics professor at the University of Southern California. At best, the price would simply decrease by less than the amount of the tariff.

“Consumer prices will always go up by any reasonable analysis of tariffs,” she said.

In fact, some of Trump’s earlier tariffs led domestic producers to hike their prices. In 2018, Trump slapped tariffs ranging from 20% to 50% on many residential washing machines from South Korea, leading Seoul-based LG to raise its prices in response. But so did the brand’s American competitors, as the newly pricier foreign models juiced demand for U.S.-made products.

Reviewing the price data, University of Chicago researchers later found “no clear distinction between domestic and foreign brands in these results, all within a range of 5 and 17 percent” — and dryers, which weren’t subject to tariffs but are often purchased alongside washers, saw price hikes as well.

A paper the following year from the New York Federal Reserve found Trump’s tariffs and other protectionist trade policies cost U.S. consumers $1.4 billion each month. “Tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers,” the authors wrote.

Prices aside, “people believe that the tariffs will protect domestic jobs, and they like this idea that we can help our American workers,” said Robert Lawrence, a professor of international trade and investment and a senior fellow at the Peterson Institute for International Economics. “I think they’re mistaken.”

That’s partly because of how tariffs reverberate through global trade, he said: “We’re going to be buying less from foreigners because their goods are more expensive. We’re going to therefore have this adverse effect on our inputs, and therefore we’re also going to be able to sell less abroad.”

Voters, however, have mixed opinions on tariffs. An NBC News poll this month found little more than a third of voters were in favor of universal tariffs, with most others opposed or indifferent, but a Reuters/Ipsos poll in mid-September found a narrow majority backing Trump’s tariff plans.

When people think of tariffs, they think of bringing jobs back or opening factories, said Maurice Obstfeld, a senior fellow at the Peterson Institute.

“Those are laudable social goals,” he said. “But what the public understands less about tariffs is that they raise prices to consumers and also to businesses that use protected inputs. They’re not really effective at bringing jobs back on a large scale.”

The nonpartisan Tax Foundation, which typically advocates for lower taxes and other pro-business policies, has estimated that Trump’s latest tariff plans would reduce the U.S. gross domestic product by 0.8% and cost 684,000 jobs. When jobs are created, they often cost more than what the job pays, economists say. In the University of Chicago washing machine study, researchers estimated each job created cost consumers about $815,000 annually.

Still, Obstfeld acknowledged tariffs’ political appeal in many regions that have struggled with the loss of manufacturing jobs. It’s easy for economists to say that noncompetitive industries should go out of business, but “we’re talking about real people with real jobs,” he said.

“This is one of the reasons why protection can be popular,” Obstfeld said. “Because otherwise, a lot of people are hung out to dry.”