Who benefits from trade tariffs?
History has shown that (almost) no one wins in trade wars. Yet, the political success of protectionist policies will depend on public perception rather than economic reality.
One of the most tragicomic aspects of Trump’s tariffs is that, according to polls, nearly half of Republican voters believe that the cost of these tariffs will be borne by the targeted countries—meaning taxpayers in Canada, Mexico, China, and soon, Europe. In other words, they assume that a simple executive order can magically funnel foreign money into the pockets of American taxpayers.
I’m sorry, but that’s not how it works.
For the benefit of protectionism advocates and their followers, let’s clarify the effects of the tariffs initially set to take effect in the U.S. on February 4 and now suspended for one month:
25% on goods from Canada and Mexico
10% on imports from China
Who Actually Pays for Tariffs?
According to Trump, tariffs serve a dual purpose: negotiating more favorable trade agreements with international partners and bolstering his image as a strong leader prioritizing American interests over global stability. But do protectionist policies truly safeguard American consumers and workers? More broadly, do trade wars have winners, and if so, who are the losers?
At the national level, the impact of tariffs resembles a combination of consumption taxes and production subsidies. Consumers face higher prices because imported goods are taxed, and domestic products become more expensive due to increased production costs. Since many domestic industries rely on energy, raw materials, and—most critically—intermediate goods sourced from abroad, tariffs inflate production costs, which are entirely shifted to consumers through price hikes.
Prices also rise because protected industries no longer have to worry about international competition. Thanks to the tariffs shield, businesses can set prices higher than those observed elsewhere in the world. In this sense, tariffs work as a subsidy to domestic producers—funded entirely by consumers.
In principle, such an approach can be useful—though risky and with uncertain outcomes—for short periods if the goal is to protect an emerging industry from competition, giving it time to become internationally competitive. But this is not the case with Trump’s tariffs, which would apply to all imported goods from the targeted countries.
In short, the cost of this new American protectionism will be shouldered entirely by American consumers—not by foreign taxpayers.
The myth of corporate and worker benefits
However, higher prices do not necessarily translate into greater profits or improved conditions for workers. Historical precedents—including tariffs implemented during Trump’s first term—suggest that rising production costs can completely neutralize the gains from price increases. Over time, domestic firms suffer from declining competitiveness, as resources—such as skilled labor and financial capital—are drawn to protected industries regardless of their efficiency. Meanwhile, more innovative and productive sectors are drained, as they face higher production costs leading to weakened competitiveness both nationally and internationally.
For workers, the negative effects of rising prices are unlikely to be offset by any potential employment rates or wage increases. Empirical evidence from Trump’s previous tariffs suggests that higher costs for intermediate goods, weakened domestic demand due to inflation, declining exports from retaliatory tariffs, and overall competitiveness losses could all harm employment and wages—significantly worsening workers’ economic conditions.
The Systemic Cost of Protectionism
Assessing the overall damage caused by these dynamics is difficult. However, estimates based on the impact of Trump’s 2017 tariffs suggest that, if the administration follows through on its full tariff plan—including the 60% increase on Chinese imports—the resulting price hikes would impose a cost equivalent to 1.8% of U.S. GDP on consumers. These estimates are likely optimistic, as they do not account for the long-term consequences of declining competitiveness and the inevitable retaliatory measures from trade partners.
It’s also worth noting an interesting asymmetry: while tariffs on Canadian and Mexican goods have been set at the promised 25%, the rate on Chinese imports has been reduced to just 10%, far below the 60% Trump campaigned on. Some analysts suggest that this has to do with Elon Musk’s business interests—Tesla relies heavily on Chinese-made components, unlike other American automakers, which depend more on Canadian and Mexican suppliers. These companies will now face higher production costs and lose competitiveness compared to Musk’s businesses. More broadly, the tariff structure also seems to reflect Trump’s ideological hostility toward democracies and affinity with autocratic regimes.
Will tariffs bring the promised huge tax revenues?
The tax revenues generated by tariffs are uncertain, as they depend on various factors:
How producers react to rising domestic prices (supply elasticity)
How consumers adjust their purchasing behavior (demand elasticity)
How trade partners respond, including retaliation
How declining competitiveness affects economic growth and, in turn, tax revenues from other sources (e.g., income taxes)
According to estimates from the Peterson Institute for International Economics, the new tariffs will not generate enough revenue to fund Trump’s promised tax cuts or the social safety measures needed to offset rising prices—even in the most optimistic scenarios.
Tariffs are regressive
In economics, a tax is considered regressive when it disproportionately burdens lower-income groups. Trump’s tariffs will hit those who spend a larger share of their income on essential goods and services—the working and lower-middle classes—while benefiting wealthier individuals who allocate only a small portion of their earnings to consumption.
Even small and medium-sized businesses within the protected industries may suffer. While they can increase prices shielded from international competition, they will be selling to an increasingly impoverished consumer base.
International consequences: A global trade war?
The global fallout could be severe. Even Arthur Laffer—a Trump-affiliated economist—has called these tariffs “a way of guaranteeing World War Three” In targeted countries, inevitable retaliatory tariffs will raise prices, reduce competitiveness, and hurt demand and employment, creating the same regressive effects seen in the U.S.
China, however, may emerge relatively unscathed. The country has successfully bypassed tariffs in the past by relocating production to Southeast Asia, where labor and energy costs remain low. If Canada will manage to quickly reorient its energy exports to Asia, Chinese manufacturers might even gain a cost advantage over U.S. and European competitors.
History has shown that (almost) no one wins in trade wars. Yet, the political success of protectionist policies will depend on public perception rather than economic reality. Trump will frame his tariffs as a defense of the national economy against foreign enemies, claiming they benefit American workers and businesses.
The role of disinformation, amplified by the social media owned by the new Putin-style oligarchs surrounding Trump, will be crucial. If government propaganda convinces the middle class, the president will have gained political capital at the expense of the very workers he claims to protect—all while weakening the U.S. economy to the advantage of a small elite.
PS: The cartoon is by Bruce MacKinnon (November 2024). The artist submitted it to multiple U.S. newspapers, but none agreed to publish it.