The Tariff Paradox

The economic news coming out of the United States underscores the trade winds blowing around Washington. If you missed it, Americans are paying more for goods. Inflation is up. The Consumer Price Index is above target. So things are costing more. Meanwhile, domestic employment numbers are reaching highs not seen since the COVID-19 pandemic.

More tariffs mean American consumers pay more for the things they consume from abroad. More tariffs also mean that American producers might replace foreign made products. That also raises prices. But, American exports are going to cost more if countervailing tariffs get implemented which means that countries that import American goods look elsewhere for cheaper products. Things just end up costing more inside America while higher cost production makes outputs less desirable and softens GDP, which puts people out of work.

When a government goes down this rabbit hole, its instincts are even more intervention. Especially in the case of Trump, his voters are going to bear the brunt of an economic downturn. He will want to prevent that. So we’re going to see more intervention in fiscal and monetary policy if the trend of higher prices and fewer jobs continues.