In recent discussions surrounding international trade policies, economists have emphasized the long-term implications of tariffs introduced during the Trump administration. Seeking to protect American industries, the federal government slapped tariffs on $283 billion in imports just last year alone. These tariffs have ignited a firestorm of conflict over their net contribution to the economy. Leading economist Antonio Fatas argues convincingly that the benefits of free trade overwhelmingly outweigh the costs. In fact, this is true even in rich countries such as the United States.
While some argue that tariffs can bolster domestic production, studies and expert opinions suggest that the repercussions are more complex. The current economic landscape has made clear that, contrary to what is suggested by Trump’s tariffs, tariffs have little impact on inflation rates or job growth. Economists are warning that we may experience lagged impacts as market uncertainty persists. As companies adjusted to these burdens, tens of thousands of small businesses have raised alarms over their ability to make future investments.
The Case for Free Trade
Economist Antonio Fatas, who had been a strong supporter of free trade, especially pointing out that it creates more economic growth. He emphasizes that “the positives (of free trade) outweigh the negatives, even in rich countries.” Fatas claims that an open and covered trading environment is good for consumers by driving down prices. Moreover, it pushes innovation and efficiency on the part of domestic producers.
He goes on to make the case for why keeping the economy open is so critical. “I think in the US, the country has benefited from being open. Europe has benefited from being open,” he states. This way of thinking would emphasize the mutually reinforcing nature of global trade and the increasing of global economic prosperity.
Today we see the effects of this dependence on international supply chains in the automotive, high tech, and other industries. To take one example, Fatas explains, many types of manufacturing industries rely on imported intermediate goods to be productive. “So I’m a worker and work in a factory. To produce what we produce we need to import microchips from Taiwan. Those things are more expensive,” he explains. Shifting the burden to consumers and businesses by relying on tariffs increases production costs. This increase in costs eventually gets passed down to the prices consumers pay.
Understanding Tariff Impacts
A 2019 study co-authored by now FTA chief Mary Amiti found “complete pass-through” of tariffs into domestic prices of imported goods. This means that firms often pass the cost of tariffs down directly to consumers. Doug Irwin, another economist, reinforces this point by stating, “Then they have to pass that on to consumers in most instances because they don’t have deep pockets where they can just absorb a 10 or 20 or 30% tariff.”
The implications go beyond increased costs for consumers. They have an impact on employment trends in the manufacturing sector. The American Institute for International Steel has pointed out that a study by the Federal Reserve Board of tariff increases found net job losses in American manufacturing. Irwin notes that “a number of studies have shown, on net, we lost jobs from the (2018) steel tariffs rather than gained jobs.” This transition happens largely due to the fact that downstream industries—like automakers and appliance manufacturers—utilize more labor in their operations than what exists in upstream steelmaking.
Moreover, when foreign markets place higher tariffs on American exports, that decreases demand for U.S. goods abroad. When prices rise for international buyers, that often means lost sales volume for American businesses. Experts have warned that this cyclical development may be damaging to long-term economic productivity and growth.
The Broader Economic Landscape
As it stands, experts say tariffs have little effect on inflation or boosting American jobs. They warn that a second, delayed reaction is still possible. “The economy will continue to stumble along until the major sources of uncertainty (including over tariffs) are resolved,” states a representative from the National Federation of Independent Business. This sentiment reflects the broader concern among business owners regarding the unpredictable nature of trade policies and their influence on economic stability.
Recent numbers show that about 50 percent of all U.S. imports are made up of those intermediate products needed to manufacture finished goods. Tariffs raise costs on Americans, including American importers. This increase in costs has the effect of making them less competitive in their markets both nationally and internationally. The current climate has resulted in an alarming trend: the share of small businesses planning capital outlays hit its lowest level since at least April 2020.
Fatas highlights the importance of investing in workforce development. This strategy is one way to address and mitigate the harmful effects of tariffs. Providing workers in impacted industries with new skills or retraining can help them adapt to changing market demands and reduce job losses.