This weekend's read is a quick one: a brief analysis from Yale University's Budget Lab looking at the economic impacts of the Trump administration's threatened tariffs on products imported from Canada, Mexico, and China. The proposal on the table — though currently delayed for Mexico and Canada — imposes a 10% tariff on Chinese imports and 25% tariffs on Mexican and Canadian imports, with an exception for Canadian natural gas, which would see a 10% tariff.
While the tariffs are imposed on the importer, in reality, those importers nearly always pass the extra cost on to consumers in the form of higher prices. In theory, this is supposed to make imported goods more expensive than domestically produced ones, giving a boost to the U.S. economy as consumers here substitute domestic products for the imports they would otherwise buy. In practice, however, domestic producers will raise their prices as well, because of the increased demand as well as the simple fact that they can because their foreign competitors can't lower their prices. But this is further complicated because the United States imports competing versions of the same product from multiple countries, so placing a 10% tariff on, for example, Canadian natural gas doesn't mean all natural gas imports will increase by 10%; and depending upon how much of U.S. consumption comes from domestic versus imported sources, the average price after tariffs could vary widely.
Tariffs are an intervention into an extremely complex economic ecosystem involving moves and countermoves, each with side effects. Often, we don't know what the precise responses will be to imposing tariffs. For example, will Canada, Mexico, and China retaliate with their own tariffs, escalating the situation into a full-blown trade war? (The early signs indicate that yes, they all will.) Also, will the Federal Reserve Bank, which sets its interest rates as a means to control inflation, tighten its lending policy in an attempt to counteract the consumer price increases that we would see as a result of new tariffs? That might be difficult, given how much pressure they are under at the moment to lower interest rates.
Yale's Budget Lab builds models that allow it to explore these and many other assumptions to predict what might happen if the tariffs do go into effect. They use the personal consumption expenditures (PCE) data compiled by the Bureau of Economic Analysis, which tracks what consumers buy, how much, and what they pay — as well as how consumers' spending patterns change as prices fluctuate.
Its analysis suggests that in the medium to long term, the Trump administration's proposed tariffs will reduce the buying power of U.S. households by about $1,200 before they start switching to products not subject to the new tariffs, and by about $1,000 after they switch. The impact varies widely depending on the product though: for example, the price of imported natural gas would increase 9.8% (since almost all of it comes from Canada), domestic natural gas producers would increase their price 4.1%, and altogether, the average price increase for natural gas (combining domestic and imports) would be about 8.4%. The average price for fresh produce would increase 1.8%; we grow a lot of food here in the United States, but there are some kinds of fruits and vegetables we import because they can't be grown here or are out of season here but in season in the Southern Hemisphere. Gasoline prices would increase 1.4%, about 4 cents per gallon. The price of a new automobile would go up 3.9%: for imports 6.9%, and for domestic ones 1.8%. On the other hand, despite the fact that the price of imported wheat would increase almost 10%, it would have almost no impact on the average price of wheat here, since we import very little.
Here's a chart that breaks down the impacts The Budget Lab predicts the tariffs will have on various consumer products.
It also looks at some of the broader impacts of tariffs. The Trump administration has been suggesting that the revenues from new tariffs could become a significant funding source for government programs; however, The Budget Lab folks predict it will only raise $1.4 to $1.5 trillion over 10 years. It sounds like a lot of money, but considering that the annual federal budget is over $6 trillion, another $140 billion per year won't cover very much — especially if the government lowers income and business taxes.
In addition, The Budget Lab folks predict that, factoring in retaliation from China, Canada, and Mexico, the U.S. economy will be 0.2% smaller than it would be without tariffs. That includes both reduced exports because of the retaliatory tariffs and increased domestic sales because of consumers switching to American-made products over higher-priced imports. On top of the negative impacts to jobs and prosperity from a slightly smaller economy, the government would also lose domestic tax revenues — around $13 billion per year.
There are a lot of assumptions in here worth questioning, and a lot of speculative mathematical modeling of what the future might look like. But it does reflect the general consensus among economists that tariffs tend to cause more problems than they solve. Global trade is an extremely complicated ecosystem, made even more complicated when policymakers weigh in to try to tip the scales to achieve political goals. We don't know exactly what will happen, or if Trump is simply bluffing to try to extract other concessions. But we will likely find out soon.
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