How Can Trump’s Universal and China Tariffs Affect the Economy?

President-elect Trump is expected to implement new trade taxes, such as a 10–20% import tax, a minimum 60% import tax on Chinese goods, and a 25–100% import tax on Mexican goods. According to at least a dozen estimates, Trump’s proposed tariffs would harm the US economy, confirming the widely held belief among economists that tariffs lower commerce and distort results, which lowers living standards. If you run a business in Campbell or Santa Cruz, you need to make immediate changes in order to adapt to the new tax laws. For more information, contact an expert in business tax preparation in Campbell and Santa Cruz. 

Effects of Trump’s universal and China tariff on the economy

When a company or person in the US buys an item from outside, a tariff is a charge on imports that is applied at the border. Tariffs raise the price of items made abroad, encouraging consumers to buy more domestically and giving domestic manufacturers the opportunity to raise their prices. Domestic producers benefit from greater prices and sales, but consumers—including corporate consumers—pay the price for these benefits. Tariffs are redistributive since they take money away from some people and give it to businesses that are protected.

The protected companies are not low-cost producers, even though the tariff may help them grow. As a result, tariffs lead to less efficient production, which ultimately decreases economic output and earnings. Since Adam Smith and the classical economists advised minimizing tariffs (tariffs being a significant source of government revenue at the time), this has been the traditional analysis of tariffs.

There are complexities to the discussion, such as how tariffs may impact the level of prices. Depending upon whether the Federal Reserve acts to ease policy and make room for the tax hike, tariffs may have an inflationary effect or provoke a short-term economic collapse. However, the long-term adjustment to tariffs involves decreased incomes and production, regardless of whether the short-term adjustment includes inflation or momentarily increased unemployment.

Effect on the size of economy

Tariffs reduce employment and investment, which eventually reduces the size of the economy. Because tariffs raise the relative costs of protected and imported goods, customers have less money to spend elsewhere after paying the higher prices. In practical terms, this means that tariffs lower the amount of money that people can use after taxes. As income declines after taxes, there are fewer incentives for employees, which lowers hours put in and, ultimately, capital investment. A continually reduced level of output and income is the outcome of fewer hours spent and a smaller capital stock.

How is output affected by the changes?

Tariffs also result in dynamic inefficiencies, which lower output. Tariffs reduce competitive limitations that would otherwise compel businesses to continue developing by establishing a protected domestic market. Businesses are able to take delight in higher profits from protection rather than having constant searches for methods to enhance processes and fulfill customer expectations. Both anecdotal and empirical evidence from previous (and current) protection episodes show that protected enterprises typically use their higher earnings to advocate for more and longer protection rather than for additional capital investments or R&D.

So, will the impact be positive or negative?

A dozen macroeconomic estimates have examined Trump’s proposed tariffs in a range of ways, ranging from estimating the decline in aggregate demand brought on by the tax increases to applying different trade models to the work at Tax Foundation calculating the impact of the tax rise on labor. Every study concludes that the US economy will suffer as a result of Trump’s planned tariffs.

The geopolitical pressure placed on foreign countries to implement retaliatory tariffs in response is a further disadvantage of adopting tariffs, as the modeling makes clear. Taxes imposed by foreign governments on US exports limit the quantity of goods that US-based companies sell overseas, which lowers incomes and further limits output.