Weekly Economic Trends and Indicators

In recent weeks, tariffs have captured the attention of the world as the Trump administration has imposed several new and expanded taxes on international trade. Some of the announced tariffs have since been paused, and the President’s ability to impose certain tariffs has been challenged in court. Over the next two weeks, we will review the background on the use tariffs in the U.S. and the current state of affairs regarding tariffs and their effects.

The constitution grants Congress the authority to levy tariffs, but over the years, Congress has delegated tariff authority to the President in certain situations. Thus, many presidents and their appointees have negotiated multilateral trade agreements which have resulted in greatly reduced tariffs worldwide, especially over the last 80 years. In addition, Congress delegates authority to the President to act unilaterally to respond to national security concerns or a national emergency.

Over the last several decades, the use of presidential authority to unilaterally raise tariffs has been rare. Some notable examples similar to the current situation are President Bush’s 2002 steel tariff and President Trump’s 2018 steel and aluminum tariffs. In the case of steel and aluminum, tariff proponents argue that it is a national security issue. They argue that in a time of crisis, a domestic steel supply is critical, and that supporting domestic steel producers by raising prices with a tariff is worth the cost to downstream industries that use steel.

History tells us that the 2018 tariffs raised the domestic price of steel and had a small positive effect on employment in the steel and aluminum industries. However, because steel was more costly, there was a significant negative effect on employment downstream. Multiple studies have been conducted, and there is a consensus that the net employment effect on manufacturing was negative. The Tax Foundation estimates that net cost to the economy was about 142,000 jobs and a loss of 0.2% of GDP.

The estimated GDP loss is fairly small compared to overall business cycle fluctuations, and 142,000 jobs is about one month of job creation. However, the job losses were concentrated in manufacturing industries that are steel intensive, which had a disproportionate impact on the Midwest. The Tax Foundation estimates that the current steel and aluminum tariffs would have a similar effect on jobs and GDP.

However, the expanded tariffs on nearly all goods could be more costly, totaling as many as 570,000 jobs lost, according to the Tax Foundation, if all the tariffs are fully implemented. These additional tariffs are being justified under a much broader interpretation of the President’s emergency powers—something that has not been attempted before with regard to tariffs and has less certain legal justification.

At present, the broader set of tariffs is on hold pending negotiations. It is possible, perhaps even likely, that these negotiations will bring down both the proposed U.S. tariffs as well as tariffs currently imposed by other countries. The result would probably be fewer jobs lost than these initial estimates and possibly some benefit to exporters if tariffs are lowered in other countries.

Next week: Part two on tariffs: revenue and retaliation