President Trump has signed executive orders giving automakers some relief from his 25 percent tariff on imported auto parts. Earlier, he announced exemptions for more than 1,000 imported items in addition to semi-conductors, smart phones and a few other electronic goods. In response to a meeting with CEOs from Target, Home Depot and Walmart, the president announced that tariffs on China will also be “substantially reduced.”
But all of this is only a small reprieve from the tariffs announced on April 2, which were the most widespread tariffs imposed since the Smoot-Hawley Tariff Act of 1930. Many of the April rates have been temporarily lowered to 10 percent, also bringing some relief. But these are still very high rates and if they become permanent, Americans should expect higher prices, higher unemployment and a slower growing or even a shrinking economy.
The tariffs themselves were expected, but their size and scope were not. The response by the stock market to the announcement was swift: In just two days both the Dow Jones Industrial Average and the S&P 500 fell sharply. On April 9, President Trump announced a “pause” and reduced tariff rates on imports from most countries to 10 percent for 90 days.
But some other imports, including many from Canada and Mexico, face a 25 percent tariff rate. Tariffs on imports of aluminum and steel from any country are still 25 percent, as well as those on autos and auto parts. Imports of potash—minerals containing potassium and used as fertilizer—from Canada and Mexico face a 10 percent tariff, as does Canadian energy resources such as crude oil. The tariff rate on many imports from China are at an incredible 145 percent.
TPC has estimated that combined, these additional tariffs would cost US residents $1.7 trillion over 10 years and reduce average incomes of families by $3,100 in 2026.
Perhaps the administration will continue to walk back tariffs closer to their pre-April 2 levels. But 10 percent could become “the new normal,” with most imports subject to 10 percent or 25 percent tariffs and orelatively few imports receiving permanent exemptions.
If that happens, which would be consistent with some of President Trump’s campaign promises, most goods will face massive tariffs compared to only a few months ago (see figure).
As a result, importers will likely pass the costs of these tariffs—which are taxes—on to their customers. Purchasing companies, in turn, can pass on their higher costs in multiple ways: Raise prices on their consumers; swallow the costs and reduce profits; lay off workers or reduce their hours; or use some combination of these. These companies may also simply stop buying goods, leading to empty shelves.
JP Morgan recently stated that tariffs this high are a “material threat to growth” and estimates that the probability of a recession is 60 percent. Economist Larry Summers made a similar prediction and also predicted that 2 million people would become unemployed as a result, and losses of household income of at least $5,000.
All of this is completely avoidable.
Tariffs can have their uses. For example, when used in a targeted fashion, they can protect strategic or nascent industries. But widespread and permanent tariffs of 10 percent or more will almost certainly hurt the economy far more than they might help it.
