President Donald Trump announced his “Liberation Day” slate of new tariffs Wednesday, following prior 25 percent tariffs on all products from Canada and Mexico, plus retaliatory tariffs from China and the European Union. The new policies frightened economists, triggered a stock market plunge and caused some Senate Republicans to break rank.
Tariffs have been in the U.S. since 1789, so why are they causing such an uproar now? To answer that question, we need to start by explaining tariffs.
To an economist, a tariff is basically a tax on imports. That means any product with a tariff becomes more expensive to import. Here’s a simple example: Let’s say you are trying to buy a T-shirt. You can buy one that is made in your own country for $10, or you can buy one from a neighboring country for $9. If these products are identical, you would want to buy the $9 shirt. Why spend more than you need, right?
Now, let’s say your country has issued a 30 percent tariff on any imported products. This means the cheap shirt you imported from the neighboring country will now be priced at $10.25, as it costs more to import. (Recent reports have shown the entirety of tariffs being passed onto consumers, so we’ll do the same for this example.) So instead of deciding between a $10 T-shirt or $9 T-shirt, your choices are between $10 and $10.25. The quality of the T-shirt from the neighboring country hasn’t changed, but you still must pay a higher price for it.
The cost of protectionism
If imports raise the cost of goods for everyone, then why do we have them? Why should we pay more when we don’t have to? The biggest reason we issue tariffs is to practice protectionism. In the example above, consumers were worse off because they must pay a higher price. On the other hand, the original T-shirt producer in the consumers’ country is now better off. Before the tariff, the seller’s $10 T-shirt was unable to compete with the cheaper product being sold by another country. Once the tariff is put in place, suddenly their product becomes cheaper by comparison, thus “protecting” this industry from the risk of imports. This idea is especially important with infant industries that don’t have the ability to compete with the bigger firms yet.
While tariffs do cause higher prices for consumers, they are protecting a country’s local firms, so maybe they aren’t so bad. Maybe that higher cost is worth it to make sure our firms are protected? The problem is that tariffs cause another concern beyond just higher prices. In some cases, tariffs can actually have a negative impact on the very companies they are supposedly protecting.
Research has shown that rather than benefitting from the protectionism of tariffs, U.S. firms have actually become less productive and less innovative. In many cases, these tariffs can mean paying extra for inputs like steel and aluminum, which could raise the price even further for products that use those inputs, such as cars and even beer. By artificially raising the cost of imported goods, tariffs also reduce the available options from which consumers have to choose. In other words, tariffs essentially reduce the competitiveness of our domestic companies while simultaneously lowering the standard of living of our citizens.
Now, let’s consider the impact from tariffs issued by other countries. Until now, we have only talked about the impacts of the U.S. issuing tariffs on others, but that is not the only thing we need to worry about. We also have to consider retaliatory tariffs. When a tariff is issued on a country, they may respond by issuing their own tariffs to protect their producers, too. We have already seen this happen when tariffs that took effect last month were issued on Canada. Within the same day that Trump announced a 25 percent tariff on Canadian imports, Canada announced a 25 percent tariff on products imported from the U.S. These retaliatory tariffs can have devastating consequences on our producers.
After the 2018 tariffs issued by the U.S. on Chinese imports, China responded by issuing tariffs on U.S. imports in what devolved into a tit-for-tat situation that dragged on for months. One of the hardest hit industries during this time was agriculture. China’s retaliatory tariffs were estimated to cost the U.S. more than $27 billion, and they caused a significant increase in farm bankruptcies and forced the U.S. to issue a $28 billion bailout for farmers affected. Soybeans were one of the hardest hit commodities, with an annual $9.4 billion loss, followed by sorghum ($854 million annually) and pork ($646 million annually).
Tariffs’ impact on Oklahoma
Now, let’s consider the potential impact on Oklahomans. We export more than $7.7 billion in products a year, with 24 percent of all of our exports going to Canada. These exports include beef, wheat, pork and soybeans. Soybeans are actually one of the most popular crops we plant, averaging $66 million in exports. We rank among the top-10 pork producing states, providing 5 percent of all pork exports and earning more than $370 million in exports in 2020. Oklahomans grow a lot of crops that were impacted by those retaliatory tariffs in 2018, accounting for an annual loss of $35 million for soybeans and $28 million for pork. Last year, our soybean exports alone added roughly $140 million to Oklahoma’s economy, so these tariffs can have significant repercussions on our farmers.
It is clear to see that tariffs can raise prices, cause inflation and cause retaliatory tariffs that hurt producers, cause job losses and increase prices. We have also seen that tariffs can lower productivity and stifle innovation within domestic companies. While some people benefit from this protectionism, the vast majority do not. Other countries want to protect their firms just like we do.
So, while the firm selling T-shirts might be better off with this tariff, the farmer exporting his crop might not, and this trade war will cause all of us to pay.
