KINGSTON, R.I. – Jan. 23, 2025 – After being sworn in as the 47th president of the United States, Donald Trump started his second term by signing the largest number of executive orders – 26 – on his first day in office.
Among those, Trump issued an executive order directing federal agencies to conduct a sweeping review of U.S. trade policies. Trump, who had promised to enact broad tariffs on imports during the campaign, announced a plan to impose a 25% tariff on products from Canada and Mexico that would go into effect on Feb. 1, while warning that he was considering imposing tariffs on most U.S. imports.
Rhody Today turned to University of Rhode Island economics professor Nina Eichacker, an expert on macroeconomic and monetary economics, to explain the role of import tariffs as well as how the president’s proposed plans may impact consumers. Eichacker is also the author of “Financial Underpinnings of Europe’s Financial Crisis-Liberation, Integration, and Asymmetric State Power,” “The Ambiguous Effects for Targeting Current Account Surpluses,” and “A Political Economy of Fiscal Space.”
Can you explain what import tariffs are and how they work? What role do they play in trade policy?
Import tariffs are taxes that are applied by governments on the value – including transport and insurance costs – of goods that are imported from abroad. While companies that sell those goods to U.S. consumers, for example, pay the tariff at the time of customs clearance of those goods, many companies then pass that cost on to consumers by charging a higher price.
Import tariffs have a long history. Before the 1900s, import tariffs were the primary means of raising tax revenue in the U.S. They may be used to discourage domestic consumption of goods produced abroad. The primary purpose of this may be to encourage more domestic production of those goods in the U.S., advance foreign policy goals, or provide leverage in trade negotiations. There’s a long history of countries – including the U.S. – using tariffs to promote domestic industry.
On his first day in office, President Trump signed an executive order directing federal agencies to conduct a sweeping review of U.S. trade policies, while also threatening a 25% percent tariff on products from Mexico and Canada. How could these tariffs affect trade and what impact would they have on consumers?
These tariffs would, first, hurt companies that sell imported goods or goods and services that rely on Mexican and Canadian inputs. Mexico has risen in prominence as a trade partner with the U.S., and these tariffs would make that trade more expensive – first for producers and then likely for consumers, since firms tend to pass tariff costs on to the people that purchase their output. Households would see higher food prices on produce, and these tariffs would likely lead to increased prices of any other products that rely on wheat, goods made with steel, auto parts and cars, computers, and crude petroleum products, among other things.
There is also a chance that Mexico and Canada might retaliate by implementing tariffs on goods produced in the U.S. This would lead to a secondary cost for producers in the U.S., who would likely see a decrease in demand for their output in Mexico and Canada if tariffs are implemented across the board.
Is there a reason the president’s plan right now focuses on Mexico and Canada?
After the initial tariffs went into effect with China, U.S. trade with Mexico increased. Mexico and Canada are the U.S.’s second and third largest trade partners, both in terms of goods imported and exported. The U.S. also runs trade deficits with Mexico and Canada in goods trade. So, some of this is an attempt to reduce U.S. reliance on goods from Canada and Mexico, but it may also be a tool for negotiating foreign policies with both neighbors.
What is the president’s role in setting trade policy and how does Trump’s approach differ from his predecessors? Are there other changes we are likely to see?
While Congress officially has the power of setting tariffs and related policies, Congress has granted U.S. presidents broad powers to set and influence tariff policies from the 1930s onward. Generally, the justification for presidential tariff interventions has been the notion of protecting national security. (In 1934, the Reciprocal Tariff Act enabled presidents to set tariffs in response to tariffs implemented by other governments; in 1962, the Trade Expansion Act allowed presidents to set tariffs on imports believed to impinge on national security; and the 1974 Trade Act empowered the president to implement tariffs in response to “trade surges” that are believed to negatively affect domestic industries.)
In a way, the Biden administration’s approach to trade policy might have been considered a continuation of the first Trump administration’s willingness to implement tariffs on large industrial powers like China. However, the tariffs that the Trump administration is currently proposing are remarkably broad, compared to tariffs proposed by the Biden administration on select goods and inputs from China, both in terms of the scope of goods subject to taxes as well as to the range of countries that are likely to be affected by tariffs.
The million-dollar question right now is whether the new Trump administration will truly implement these tariffs. These tariffs are likely to hurt low- and middle-income households considerably. Tariffs on Chinese output will affect so many goods, from baby products to clothing to tech products. Implementing them will raise the costs of goods for all Americans. They will also hurt small businesses, which have less wiggle room to find new suppliers compared to large corporations like Walmart, Amazon, or similar businesses. Employees at firms that suffer the fallout of tariffs may go without bonuses as companies try to figure out where they can cut costs.
However, there is so much pressure to implement these tariffs, and so much stated support from the Trump administration for these tariffs, that I think it is likely we’ll see some version of these tariffs coming forward.