Tariffs, the one word on everyone’s lips right now, are being lauded in the Trump administration as a cure-all, but are they really?
Trump has touted tariffs—“the greatest thing ever invented,” in his own words at a Michigan campaign rally—as a cornerstone in his America First agenda, claiming tariffs will create more manufacturing jobs and cheaper food.
That’s not how it worked the last time around. A study from economists at Harvard, the Massachusetts Institute of Technology, the World Bank, the National Bureau of Economic Research, and the University of Zurich found Trump’s first term tariffs “neither raised nor lowered US employment.”
In Trump 2.0, the administration has been thinking about tariffs in a seemingly contradictory way, according to Erica York, a senior economist with the Tax Foundation, where she leads tariff and corporate tax policy research.
In his inaugural address, Trump claimed tariffs can be used as a revenue generation tool. On the campaign trail, he also floated using tariffs as a negotiation tool, going so far as to say he could use tariffs to prevent wars. At a rally in North Carolina last August, he said if a country threatens war, he’ll threaten tariffs.
“We’re going to charge you 100% tariffs,” Trump said. “And all of a sudden, the president or prime minister or dictator or whoever the hell is running the country says to me, ‘Sir, we won’t go to war.’”
“It’s important to emphasize [revenue generation is] contradictory to tariffs for negotiation,” York explained, “because in order for the tariffs to raise revenue, they have to stay in place permanently, and it’s going to be hard to get any negotiating concessions if you’re not willing to actually lift the tariff when countries make changes.”
We can also learn from what happened last time around. Meaning: We’ll likely see higher tariffs stick around in certain areas, and we’ll also see some tariff threats never fully pan out or take effect for long, York noted.
Take the tariff saga with Mexico in Trump 1.0: Dramatic threats, negotiations, and then “it looks superficially like the US is getting concessions, but really, in most cases, it’s either policy developments that were already in the works or policies that were already in place, just kind of like repackaging them to make it look like a political win,” in York’s telling.
But even in those scenarios, she points out there can still be economic damage, noting that investment delays and general uncertainty “can have [their] own negative economic effect, even if the tariffs never happen.”
Jake Colvin, president of the National Foreign Trade Council, a business association that promotes the interests of US companies globally, worries that the focus on tariffs could detract from a more positive potential outcome of Trump’s trade outlook: a reappraisal of the right tools in the US’s toolbox for improving US global trade policy.
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“There is an interest, in the US business community, of encouraging US global economic leadership, and in the president and the administration standing up for American companies when they’re being unfairly discriminated against abroad,” he noted.
“Our hope and desire is that tariffs don’t completely dominate the conversation,” Colvin added. “There’s a real opportunity for the administration to take a global leadership role on the economy and promote US innovation and interests and unlock markets for American companies abroad.”
That might not be able to happen if everyone’s energy is sucked into tariff cost management.
“Putting tariffs on imports from Canada and Mexico risks undermining America’s relationship with our closest trading partners and allies and has the potential to affect the price and availability of everything from avocados to automobiles,” he told CFO Brew via email after Trump’s proposed tariffs took effect. “Our focus should be on working together with Canada and Mexico to gain a competitive advantage and facilitate American companies’ ability to export to global markets.”
What can CFOs do? If we were writing a playbook on dealing with uncertainty, we’d link to some deep breathing exercises or yoga-at-your-desk videos. But this is an article about tariffs.
So, how should CFOs be thinking about tariffs right now? First, settle in. Eras of high tariff activity don’t necessarily end when tariffs ease up, York noted, citing the lingering effects of former President George W. Bush’s steel tariffs in 2002.
“Even something that’s temporary or lifted soon after it’s imposed can have a lasting impact, because if you think about global supply chains, and how businesses source their materials, and all of that, it depends on relationships that they’ve developed over long periods of time,” she stressed. “When you disrupt those…it can’t just snap back into place.”
Stockpiling to try to get ahead of anticipated hikes, as some companies have done, is “a short term band-aid,” she added, and ultimately points to the downsides of tariffs “because it is businesses and people in the US who are bearing the burden of this.” (For a handy primer on preparing your supply chain for tariffs, look no further.)
The most important advice right now is also the simplest: Stay hyper tuned-in. “It would be a mistake to just think you can keep your head down and either fly under the radar or be immune from the sort of policy forces that are buffeting the business community and the global economy,” Colvin noted.