How do tariffs work? The reason why Trump’s plan to increase trade taxes will cost US consumers more money

Donald Trump’s campaign for the presidential election placed tariffs at the forefront of his economic strategy. The president-elect promised the US would charge 25 percent tariffs on all imports from Canda and Mexico starting the first day of his administration.

This aggressive trade policy forms the cornerstone of Trump’s economic platform, which he claims will boost domestic manufacturing and raise billions for the economy. But experts say it will have the opposite affect because companies that rely on goods from other countries will have to pay more and eventually that cost will trickle down to the American consumers.

Tariffs are taxes imposed on imported goods, and while they may seem like a straightforward way to protect domestic industries, their economic impact is far more complex and often detrimental to consumers. Understanding how tariffs work is crucial to grasping why Trump’s proposed policy could lead to higher costs for American households.

How do tariffs work?

When a tariff is imposed, it is the importing company that pays the tax. For example, if a 20 percent tariff is placed on imported televisions, a $500 TV could suddenly cost $600, with the extra $100 going to the government as tax revenue.

The idea behind the plan is to encourage American manufacturing and American made products rather than items from abroad. However, domestic producers will raise their prices due to reduced competition from foreign products, while businesses that import products will pass on the additional cost to consumers through higher prices.

Economic impact beyond price tags

The effects of tariffs extend beyond immediate price increases. They can disrupt supply chains, leading to shortages and further price hikes. Additionally, retaliatory tariffs from other countries would harm US exporters, potentially leading to job losses in export-dependent industries.

Trump’s previous tariffs, implemented during his first term, have already demonstrated the potential negative impacts. Studies show that these tariffs cost the average household between $200 to $300 annually in increased taxes.

Economists project that Trump’s new proposals could be even more costly, with estimates suggesting they could reduce long-term GDP by 0.8% and eliminate 684,000 full-time equivalent jobs. The Tax Foundation estimates that Trump’s proposed tariffs could amount to a tax increase of $524 billion annually for American consumers.