The Trump administration announced new tariffs on foreign-made vehicles and broad reciprocal tariffs, stirring discussions on their economic implications. Three University of Chicago experts provided insights into the mechanisms of tariffs, their impact, and the broader economic context.
Robert Gulotty, associate professor of political science, explained that tariffs are federal taxes targeting goods at the border, set by Congress. They serve to raise government revenue, shift money from consumers to domestic producers, and influence global markets.
Economics associate professor Rodrigo Adão mentioned research from the 2018 trade war, stating that consumers and US firms predominantly bear the tariff costs. Consumers experience price increases on goods, while retailers and firms importing these goods also share the burden.
Steven Durlauf from the Harris School of Public Policy noted that tariffs raise consumer prices, impacting various sectors. For instance, many vegetables and crude oil processed in the US are imported, and a significant portion of US toys are produced in China. The imposed tariffs result in higher costs for these goods.
Adão highlighted the uncertainties surrounding tariff implementations, citing how discussions and threats of tariffs have already led to preemptive actions by car manufacturers and alterations in consumer and producer behaviors. Durlauf added that such uncertainties harm the economy, as indicated by elevated levels on the Economic Policy Uncertainty Index.
Despite arguments favoring tariffs for job protection, Durlauf indicated that they often lead to negative employment outcomes. He used the example of steel tariffs, which, while boosting employment in the steel sector, resulted in job losses in related industries due to higher production costs.
Gulotty commented on the historical use of tariffs in US trade policy, noting the unique nature of current tariff practices which lack historical precedent due to their unpredictability. He compared them to the 1807 Embargo Act and its unintended consequences.
On international relationships, Adão stressed the amplified impact of tariffs on neighboring countries with strong trade ties, leading to potential disruptions. Citing the car manufacturing industry, he described how cross-border supply chains can be adversely affected by tariffs.
Finally, Gulotty pointed out the broader political challenges posed by tariffs, which can complicate relations with foreign countries. He remarked on the US's shift away from established systems for managing trade tensions, potentially hindering economic relations built over decades.
The content is based on material previously published by the Harris School of Public Policy.