What Are Tariffs?

Tariffs are taxes imposed by a government on imported goods. These are usually applied as a percentage of the import’s value and are designed to make foreign products more expensive compared to domestic alternatives. Governments use tariffs for:

• Protecting domestic industries
• Generating revenue
• Leveraging trade negotions

While the concept is simple, the effects of tariffs ripple through various sectors of the economy and can be both positive and negative, depending on the context.

 

Job Creation (in protected industries)

Tariffs can boost employment in industries that face heavy foreign competition. By making imported goods more expensive, domestic producers may see increased demand, encouraging them to hire more workers.

 

Examples:

• U.S. steel and aluminum tariffs in 2018 led to modest job growth in domestic steel production
• Textile industries in developing countries often benefit from import restrictions in local markets

Job Loss (in downstream and export sectors)

However, industries that rely on imported inputs may see higher costs, leading to reduced output, profit margins, and employment. Also, when trading partners retaliate, export-oriented jobs are put at risk. As of 2022, the US employed approximately 34.7 million workers in export- related industries. Depending on the trade war’s nature, some workers will lose their jobs. It depends on how aggressive the trade war becomes with the US initiating tariffs and the response by foreign countries.

 

Examples:

• U.S. manufacturers using steel (e.g., auto, machinery) faced increased costs after steel tariffs
• American farmers lost market access due to retaliatory tariffs by China and the EU, leading to income drops and layoffs
  

Net Effect: Most studies suggest that tariffs lead to a small net loss of jobs overall, as gains in protected industries are usually offset by broader economic inefficiencies and retaliatory impacts.

 

Broader Economic Impacts

Short-Term Economic Shifts

• Higher prices: Tariffs increase consumer prices, reducing real income
• Shifts in production: Some domestic sectors may benefit temporarily
• Inflationary pressure:  Input cost increases can affect prices economy-wide.
• Slowing economic growth: The Atlanta Fed's GDPNow estimates the US GDP is contracting slightly

Long-Term Structural Effects

• Inefficiency: Protection of uncompetitive industries can reduce innovation and productivity
• Distorted supply chains: Global companies may relocate operations to avoid tariff costs
• Reduced inflation: Aggregate demand shrinks as consumers spend money on fewer goods and services
• Reduced trade volume: Tariff wars typically reduce global trade, slowing GDP growth.  The Smoot-Hawley tariffs were credited for shrinking US imports by 40% between 1930-1932 which deepened the Great Depression

Macroeconomic Indicators Affected

• GDP: Often reduced due to inefficient allocation of resources
• Investment: Business uncertainty around trade policy can reduce capital investment
• Exhange rates: A country's currency may fluctuate in response to changing trade balances

Net Effect: Tariffs may decrease trade, increase unemployment and slow economic growth while causing a temporary increase in inflation.

 

Summary of Trump Tariffs 2.0

• The average tariff rate on all imports will rise from 2.5 percent to 16.5 percent - the highest average rate since 1937 - under the Trump tariffs announced for 2025.  Tariffs will cause imports to fall by slightly more than $800 billion in 2025, or 25 percent.
• The universal tariffs unveiled on April 2 will raise $1.5 trillion in revenue over the next decade and shrink US GDP by 0.4 percent.  So far, it is estimated that tariffs will raise nearly $2.9 trillion in revenue or $290 billion per year over the next decade.  It will also reduce US GDP by 0.7 percent or $194 billion per year.  This isn't factoring in foreign companies relocating supply chains to the US or substituting US consumers for others.
• The tariffs will reduce after-tax income by an average of 1.9 percent and the amount to an average tax increase of more than $1,900 per US household in 2025.
• China, Canada and the European Union have announced retaliatory tariffs altogether affecting $330 billion of US exports.  Retaliation will reduce US GDP by another 0.1 percent per year.
• In 2025, the Trump tariffs will increase federal tax revenues by $258.4 billion, or 0.85 percent of GDP, making the tariffs the largest tax hike since 1982.  The 2025 Trump tariffs are larger than the tax increases enacted under Presidents George H.W. Bush,  Bill Clinton and Barack Obama.
• The first Trump administration-imposed tariffs on thousands of products valued at approximately $380 billion in 2018 and 2019.  The second Trump administration tariffs now affect all United States imports excluding USMCA trade and certain energy-related imports, or more than $2.5 trillion of US imports.

 

Case Study: U.S. Tariffs (2018–2020)

• Steel jobs: ~3,200 jobs were added in the steel sector
• Manufacturing jobs:  An estimated 75,000 jobs were lost in sectors hurt by higher input costs
• Farm sector:  Received over $28 billion in subsidies to offset export losses.

Financial Market Impact

As we have seen, the financial markets have been volatile since the announcement of the tariffs on April 2. As the uncertainty surrounding trade continues, the markets will most likely continue to be volatile as investors, business owners, managers and households are unable to forecast incomes. As such, they have paused their large spending and investing plans. This pause is slowing the economy. If the trade situation becomes more certain and investors can be more confident in revenue and earnings forecasts, then the financial markets may calm. Until that time, we have taken steps to help manage the volatility.

 

We have employed our Hedging Protocol with a 2.5% position added in early March. We then increased this allocation to 10% last week. We continue to be vigilant in monitoring the trading conditions of the equity, bond, commodity and currency markets.

 

Conclusion

Tariffs are a double-edged sword. While they can temporarily protect domestic jobs and industries, they often lead to higher prices, job losses in other sectors, and slower economic growth in the long term. A well-targeted tariff might help stabilize a key industry, but broad or prolonged tariffs tend to distort markets and reduce overall economic efficiency.