How U.S. Tariffs Impact Global Economies

Let’s start with “What are Tariffs”?

Tariffs are an economic tool with the goal of reducing foreign competition and supporting domestic companies. However, tariffs also come with significant negative side effects on small businesses, the global economy, and international trade. In recent years, U.S. tariffs have sparked intense debate among policy makers with advocates highlighting protectionist benefits and critics pointing to economic costs. However, while tariffs do have the ability to offer some short-term protections to domestic businesses, their broader impacts ultimately harm exports, consumers, and global economic stability.

How Tariffs Impact Small Businesses and Individual Consumers

Small businesses, which are the backbone of the American economy, can be significantly negatively impacted by tariff hikes. Many of these businesses often rely on imports for products or portions of products such as raw material and component parts, and tariff increases can directly increase costs. Small businesses are often forced to pass these increased costs onto the consumer. According to an article on this issue by the National Retail Federation (NRF), the tariffs often leave small businesses ‘choosing between raising their prices or cutting into already slim profit margins” (National Retail Federation, 2024). As a reputable trade association representing retailers, the NRF suggests that tariffs may force some small businesses into unsustainable cost increases or even closure, making these tariffs detrimental to the foundation of the economy. With choices like these, small businesses often have to raise prices and lay off domestic workers as a response to lower demand.

Tariffs function as an indirect tax on consumers since increased costs are often passed onto consumers. Furthermore, tariffs are paid by the importer, not the exporting country, and ultimately affect consumers. The NRF estimates that a unilateral increase in tariff rates could cost middle-income households approximately $1,700 in additional yearly expenses. (National Retail Federation, 2024) Low-income households, in particular, may feel the impact more severely, as they have less disposable income to start with.

As an importer and entrepreneur myself, I have experienced this firsthand. I have an Amazon business that imports from China. Even a small increase in tariffs of 10–20% would make it very difficult to maintain my competitive advantage. As a small business that works on slim profits, I would not have the ability to absorb the cost of the tariffs and would ultimately need to raise my prices.In the long term, higher prices may reduce sales and revenue, further straining small businesses like mine.

Global impact on Tariffs’ effect on the U.S. Economy

Broad tariff increases, in addition to impacting small businesses and individual consumers, can lead to larger economic challenges, including inflation and decreased productivity. As explained by the White House’s Council of Economic Advisors, tariffs on imports raise the cost of final products and increase domestic production costs, creating “significant declines in domestic output and productivity” (Council of Economic Advisors, 2024).The Council, a reputable nonpartisan advisory group, highlights that these declines threaten both the short-term and long-term U.S. productivity. In other words, as the cost of inputs rises, U.S. goods become less competitively priced on the global market. This, in turn, makes U.S. goods more expensive to produce and less appealing both domestically and internationally.

In addition, tariffs can often trigger reciprocal actions from other countries, which directly and immediately reduces U.S. exports. For example, China’s retaliatory tariffs placed on U.S. goods in response to recently implemented U.S. tariffs led to an estimated $11.6 billion decrease in American exports (Tax Foundation, 2018). The U.S.-China tariffs implemented in 2018, resulted in widespread financial impacts across sectors demonstrating the significant economic repercussions of tariff wars.

Global Impact and Trade Disruptions

Globally, high U.S. tariffs can weaken international trade relations, destabilize global trade, and disrupt established supply chains. According to the New York Times, “a universal tariff policy ( such as tariffs on multiple sectors or countries) would deliver a devastating jolt to world trade by restricting exports and imports for both allies and adversaries alike” Tariffs also challenge the reliability of global supply chains by disrupting the free flow of goods between different international countries. In turn, this could cause retaliatory tariffs imposed on U.S. goods, which would trigger global trade wars leading to slower economic growth worldwide.

In addition, with the imposition of U.S. tariffs, other countries may reevaluate their trading policies and shift away from the U.S. market. Economist Kimberly Clausing from the Peterson Institute states that previous tariffs initiated reactions that slowed down trade adjustments “to rebalance trade flows, exacerbating the economic shock for all involved nations” (Peterson Institute, 2024). These trade adjustments include shifts in currency valuations, diversification of trade partners, and attempts to bypass U.S. markets, all of which further destabilize economies.The potential impact of a major U.S. tariff increase could upset the global economy and create a slowdown, especially for nations relying heavily on U.S. trade.

Lastly, tariffs historically have not been proven to be a very effective long-term strategy for economic growth. The Brookings Institution notes that although tariffs offer short-term industry protection in some cases, they also tend to reduce competition and innovation, which are essential for healthy economic growth (Brookings Institution, 2024). High tariffs, as research has consistently shown, can limit growth and consumer choices.In addition, high tariffs further exacerbate wealth inequality by increasing the burden on low-income families more than on higher-income families. The Brookings report found that these policies disproportionately impact low-income households by raising the costs of everyday goods. This further increases the gap between economic classes.

Although at first glance tariffs look like an effective economic tool, they actually have unintended negative consequences on both domestic and global economies. A more effective strategy would be for policymakers to create strategies that promote fair trade without hurting domestic businesses and citizens. A balanced approach that promotes fair trade while encouraging domestic growth could provide a more sustainable solution for the U.S. economy.

Bibliography

Council of Economic Advisors. Tariffs as a Major Revenue Source: Implications for Distribution and Growth. The White House, July 12, 2024. https://www.whitehouse.gov/cea/written-materials/2024/07/12/tariffs-as-a-major-revenue-source-implications-for-distribution-and-growth.
National Retail Federation. Tariffs Have Costly Consequences for Consumers. National Retail Federation, 2024. https://nrf.com/blog/tariffs-have-costly-consequences-consumers.
Tax Foundation. The Economic Impact of the U.S.-China Tariff War. Tax Foundation, 2018. https://taxfoundation.org/research/all/federal/trump-tariffs-biden-tariffs.
Brookings Institution. What Are Tariffs and Why Are They Rising? Brookings Institution, 2024. https://www.brookings.edu/articles/what-are-tariffs-and-why-are-they-rising/.
New York Times. Trump Tariffs and the Impact on U.S. Trade Relations. New York Times, August 27, 2024. https://www.nytimes.com/2024/08/27/business/trump-tariffs-us-trade.html.
University of Michigan News. Global Ripple Effects: Expert Insights on Trump’s Tariff Plans. University of Michigan News, 2024. https://news.umich.edu/global-ripple-effects-expert-insights-on-trumps-tariff-plans/.