Debunking Trump’s Inaugural Speech: Tariffs and Inflation
Donald John Trump was inaugurated as the 47th President of the United States on Monday, marking his return to the White House four years after his previous term. In his 29-minute inaugural address, Trump proclaimed, "The golden age of America begins right now," as he and Vice President JD Vance took their oaths in the Capitol Rotunda. On this significant day, his aides announced plans for numerous executive actions covering a wide range of topics, including immigration, energy, trade, education, and contentious cultural issues.
Trump asserted that, instead of taxing American citizens to benefit other countries, the U.S. would impose tariffs and taxes on foreign nations to enrich its own citizens.
While no new tariffs were announced on inauguration day, Trump said tariffs on Canada and Mexico could be implemented on February 1, as he directed federal officials to review U.S. trade relationships for any unfair practices, including those with Canada, Mexico, and China. The president has committed to imposing import duties of 25% on Canada and Mexico, 10% on global imports, and 60% on Chinese goods.
The True Cost of U.S. Tariffs on American Consumers
A tariff is a tax on imports, also known as a duty or trade barrier. Its primary purpose is to protect domestic production and jobs, although economists note that other domestic sectors and consumers often bear the cost through higher prices. The U.S. has imposed tariffs on imports for centuries, but before Trump’s China tariffs in 2018, the global trend was toward lower tariff rates, reduced trade barriers, and expanding global trade.
Countries typically impose tariffs to safeguard industries deemed essential or politically influential. President Trump justified tariffs on aluminum and steel by citing national security concerns. The goal of a tariff, which a government imposes to increase the cost of a specific import, is to limit or reduce the quantity of that good entering the country. By making imports more expensive, tariffs can enhance the economics of producing that product domestically.
Countries may also impose tariffs or raise tariff rates on trading partners to encourage those nations to lower their tariff rates or other trade barriers. Tariffs also generate government revenue, a point President Trump has emphasized. Total taxes collected on U.S. imports doubled from $37 billion in 2015 to $74 billion in 2020, following Trump’s broad imposition of tariffs on Chinese imports. However, to mitigate the impact of reduced Chinese agricultural imports, Trump provided $61 billion in taxpayer aid to U.S. farmers.
How U.S. Importers and Consumers Bear the Burden of Tariffs
Multiple studies have shown that tariffs imposed by the U.S. government are paid by U.S. importers, not foreign countries. The economic burden of these tariffs is almost entirely shouldered by U.S. firms and consumers. According to the research paper "Who's Paying for the U.S. Tariffs? A Longer-Term Perspective," published by the National Bureau of Economic Research, the costs of U.S. tariffs continue to be predominantly borne by U.S. firms and consumers. In most sectors, these tariffs have been fully passed on to U.S. companies and consumers.
Another study conducted by Pablo D. Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal analyzed the short-term effects of a shift back to protectionism on the U.S. economy. The findings revealed that import and retaliatory tariffs led to substantial drops in imports and exports. Prices of tariffed imports remained unchanged, indicating that the tariffs were fully passed on to duty-inclusive prices. As a result, U.S. consumers and firms who purchase imports faced losses amounting to $51 billion, or 0.27% of GDP.
By incorporating estimated trade elasticities into a general-equilibrium model of the U.S. economy, the study showed that, after considering tariff revenue and benefits to domestic producers, the overall real income loss was $7.2 billion, or 0.04% of GDP. The research also indicated that import tariffs favored sectors in politically competitive counties, with workers in the tradable sector in predominantly Republican counties experiencing the most significant negative effects due to the retaliatory tariffs.
Trump’s Claims on Inflation
Another claim made by Trump: "Next, I will direct all members of my cabinet to marshal the vast powers at their disposal to defeat what was record inflation and rapidly bring down costs and prices. The inflation crisis was caused by massive overspending and escalating energy prices, and that is why today I will also declare a national energy emergency."
During Biden’s presidency, the highest year-over-year inflation rate reached approximately 9% in 2022, the highest in about 40 years. The highest sustained year-over-year U.S. inflation rates were recorded in the 1970s and early 1980s, with price increases sometimes ranging from 12% to 15%.
Most economists agree that federal spending under both Trump and Biden contributed to recent inflation, but it was not the sole cause. Other factors include pandemic-related disruptions to supply chains and the global economy, Russia’s war on Ukraine, and pent-up demand. As of last month, inflation had decreased to 2.9%.
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