The levies are also likely to reduce Americaβs economic output, as has happened before. A 2020 study, based on data from 151 countries, including the US, between 1963-2014, found that tariffs have βpersistent adverse effects on the size of the pie,β or the gross domestic product of the country imposing them.
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There are a number of possible explanations for this.
One is that, when tariffs are low or non-existent, the country in question can focus on the kind of economic activities where it has an edge and export those goods and services, Gimber told CNN.
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βIf you raise tariffs, youβre not going to see that same level of specialization,β he said, noting that the result would be lower labor productivity. βThe labor could be better used elsewhere in the economy, in areas where you have a greater competitive advantage.β
Another reason output falls when tariffs are raised lies in the higher cost of imported inputs, wrote the authors of the 2020 study, most of them International Monetary Fund economists.
Fatas at INSEAD suggested the same reason, providing an example: βSo Iβm a worker and work in a factory. To produce what we produce we need to import microchips from Taiwan. Those things are more expensive. Together, me and the company, we create less value per hour worked.β
Yet another way tariff hikes can hurt the economy is by disrupting the status quo and fueling uncertainty over the future levels of import taxes. That lack of clarity is particularly acute this year, given the erratic nature of Trumpβs trade policy.
Surveys by the National Federation of Independent Business in the US suggest the uncertainty is already weighing on American companiesβ willingness to invest. The share of small businesses planning a capital outlay within the next six months hit its lowest level in April since at least April 2020, when Covid was sweeping the globe.
βThe economy will continue to stumble along until the major sources of uncertainty (including over tariffs) are resolved. Itβs hard to steer a ship in the fog,β the federation said.
Whichever forces may be at work, the IMF, to cite just one example, thinks higher US tariffs will lower the countryβs productivity and output.
