President Donald Trump has promised to impose high tariffs on imports from Canada, Mexico and China.
President Donald Trump has promised to roll out a flurry of tariffs on imports starting April 2, coining it “Liberation Day.” Specifics are still unclear, but he has threatened to impose tariffs on lumber and automobile parts. He says these tariffs will help strengthen the domestic economy and decrease reliance on foreign goods.
Trump has already imposed a 20 percent tariff on imports from China; China has already responded with a 15 percent tariff on coal and natural gas products and a 15 percent tariff on farm exports. Trump also imposed a 25 percent tariff on Canada and Mexico, the U.S.’s largest trading partners.
Michael Hicks, an economist at Ball State University, said consumers could pay most of the tariff burden through increased prices. Products such as fruit and electronics are likely to become more expensive.
“If you want to order Door Dash, the cost is going to go up because the cost of some of the inputs, avocados for the guacamole and your tacos, are going to go up,” he said.
Hicks said auto and home insurance rates are bound to increase, with higher home prices and potentially fewer sales. About 30 to 40 percent of automobile parts are imported and travel between the U.S. and international factories multiple times in the production process. Tariffs will raise car costs 8 to 12 percent.
Since Trump has created a great deal of economic uncertainty with these tariffs, Hicks said businesses may feel less inclined to spend money until they know more about what could happen.
“For businesses, your best option is to do nothing right now or to delay activities that might be beneficial to the economy,” he said. “So you're not going to invest in new plant or equipment, you're not going to add employees, you're not going to do that big expansion. You're not going to sign a contract to do more work, because you don't know how much it will cost in the future.”
If businesses are spending less and making less money from international sales, fewer jobs may become available, Hicks said. Consumer spending could also decrease, with people wanting to save money to be able to afford more expensive products. As a result, the U.S. may enter a recession. Recessions occur when there is a decline in economic activity and reduced trade.
“It will last for many months,” he said. “The problem with this is that in order to get out of the recession, we have to either get a lot better at manufacturing, or more likely, we're going to have to rebuild supply chains. And the time it takes to rebuild supply chains will be many, many years. So an automobile supply chain would probably be on the order of a six- to-10-year re-establishment. So the long-term pay gain that the President is promising cannot materialize for many, many years.”
Hicks said trade relations are also at risk of being damaged. Several countries have already imposed retaliatory tariffs. Businesses in Canada and now Denmark are boycotting American goods, such as bourbon and Tesla cars. Some alcohols are produced in Kentucky and Indiana and contribute to the local economy.
“If Canada is now taking those things off the shelf and instead trying Mexican whiskey or something else, I think that's a very damaging risk to the long-term health of those in those industries,” he said.
