Can the US reverse globalization and rebuild the manufacturing sector by imposing tariffs on imported products? Others can debate the politics of this initiative, but the economic implications are clear. This proposal would lead to an increase in consumer inflation, negatively impacting consumers' purchasing power. It would also negatively affect the competitive position of manufacturing companies, as much of what we import is a direct input in the domestic production process. So, it's a losing proposition for consumers and manufacturers.
Tariffs are a tax on imported goods. The burden of this tax falls on the importer, a domestic company, at the port of entry. No foreign business or foreign government pays the tariff. Therefore, increasing tariffs will inevitably lead to higher prices for consumer goods, or squeeze the margins of US firms.
The potential inflationary impact of this policy cannot be overstated, especially considering the US's heavy reliance on imported goods. In 2023, US imports of finished and unfinished products exceeded $3 trillion, accounting for roughly half of the domestic production of goods. This level of reliance means that any increase in tariffs would have a substantial and far-reaching impact on the economy.
Recall that bottlenecks and supply chain issues during the pandemic led to substantial price increases in imported consumer goods. In 2021, prices for imports of consumer goods rose 10%, and consumer goods prices in the CPI index rose 12%. Import prices rose again in 2022, rising 4%, and CPI goods prices jumped 5%. So, there is a direct link between import prices and prices at the retail level, indicating the impact of tariffs on consumer price inflation would be substantial.
Second, according to the data, over 60% of the imported goods are used to produce final goods in the US. US manufacturers import materials and supplies because they are cheaper, sometimes better quality than what is available at home, or there is no equivalent supply in the US.
It makes no sense to impose a tariff on imported goods without understanding their use or importance in the domestic production process. Directly and indirectly, it will hurt the competitiveness of the US companies the proposal intends to help.
Globalization had hard, difficult tradeoffs. It hollowed the manufacturing sector and many communities, disrupting the lives of a generation of workers. Yet, those economic outcomes were the result of the politics of yesteryear. Today's politics may make different decisions, but don't expect better economic outcomes if they try to reverse globalization with tariffs.
There is a profound need for tariffs to maintain a level playing field. However, tariffs are almost never applied appropriately, so, pick your poison: inflation or the total lack of American jobs across a variety of industries. The right answer is probably somewhere in between.