President Donald Trump may have decided to suspend imposing new tariffs on Mexico Friday night, but experts say that his willingness to threaten to use tariffs — and his administration’s ongoing tariffs on certain goods — is still enough to harm many Americans.
Experts say existing U.S. tariffs with China are already starting to hurt consumers, and that continued threats to impose new tariffs are creating an uncertain environment for companies to do business. Experts also maintain that it is the American consumer who pays not only for the current tariffs in place, but for the wavering business environment created by President Trump’s threats.
Here’s what you need to know about tariffs, and how the President’s actions might effect the economy.
What is a tariff?
Tariffs are taxes a country imposes on goods or services from other countries. Tariffs may be imposed as a fixed fee for a type of good, or as a percentage of the item’s total value.
Tariffs are typically used as “tools” for a number of economic reasons, including safeguarding a country’s domestic industry or counteracting unfair practices in another country, Mary Lovely, a Syracuse University economics professor who specializes in international trade and investment, told TIME.
While economists disagree about the extent that tariffs should be used, they agree that tariffs create winners and losers within the countries that impose them. For instance, the trouble with steel and aluminum tariffs on China is the demand in the U.S. for steel and aluminum is higher than the amount of workers domestically producing the metals. Therefore tariffs against China would penalize those U.S. companies who need steel and aluminum to make products.
“There’s this fallacy that [tariffs] protects jobs. It doesn’t,” said Lovely.
Who pays for tariffs?
The two biggest factors that are likely to affect most Americans will be higher prices for consumer goods and slowing job growth, including for manufacturing jobs, Lovely says. The price of washing machines, for instance, went up by about 12% as a result of the 2018 tariffs on China.
Lovely says that consumers shouldn’t be fooled by Trump’s claims that other countries are paying for tariffs. Companies typically just pass the cost of the tariffs on to customers, and the government who imposes the tariffs pockets the profits.
“It is a huge tax on Americans, and it’s a very aggressive tax,” Lovely says. “If the question is who pays the tariffs, the answer is we do.”
How do the President’s threats to impose tariffs affect the U.S. economy?
Kyle Handley, an associate professor of business economics and public policy at University of Michigan Ross, said that one of the biggest problems with threatening to create tariffs is that it creates uncertainty for both U.S. and international businesses. Companies faced with uncertainty often have a harder time planning ahead, and may be less inclined to make certain risks — such as hiring new workers, investing in new equipment, or moving into new export markets.
In fact, the federal reserve has already said that business spending has slowed down this year.
“I think that the repeatedly threatening trade partners with tariffs and then pulling back on the threat, or sometimes actually implementing the tariffs, it just creates a business environment where firms aren’t sure what to do,” Handley said. “These repeated threats – taking us to the brink and then pulling back— they don’t correspond to the planning cycles that firms are using to decide, where we’re going to invest and what countries should we operate in.”
Over time, Handley says, Trump’s willingness to use tariffs as a threat may make the United States seem less trustworthy and less fair to other countries that are considering doing business with the country, which could hurt American trade deals such as the as-of-yet unratified USMCA.
“The commitments that President Trump is making – they’re not really commitments. They’re not credible,” Handley says. “And so as soon as those commitments become less credible, or any trade policy becomes more temporary, then the value of these agreements and these trade relationships just goes down.”
Lovely also warned that uncertainty might be the “biggest threat” to the U.S. expansion in the aftermath of the recession.
“The sad part is we’ve had this incredible expansion,” Lovely said. “We had the chance to bring some people back into the workforce who had really been hurt under the recession. And I’m worried that’s going to be jeopardized before those people have a chance to get a full-time job.”