Trump’s trade war will hurt poor Americans most

As President Trump’s trade wars on multiple fronts escalate—and de-escalate and re-escalate—pose significant risks to the U.S. economy. Tariffs are bad for economic growth, increase corruption in Washington, disrupt relations with our allies, and make domestic producers less innovative, efficient, and competitive. But one under-reported consequence of Trump’s tariffs will be their disproportionate impact on low-income Americans. 

The economy-wide impact of tariffs on inflation is likely to be modest since goods make up only about a quarter of GDP. But as an analysis by Jackson Mejia for FREOPP has shown:

[H]igher inflation is particularly bad because low-income households are worse off than high-income households for the same rate of inflation. That is because they typically already have lower budgets and lower savings, so any increase in their prices hurts them even more. Moreover, they typically devote a larger share of their budget to essentials like food, housing, and transportation, which are disproportionately affected by rising prices. Goods like these tend to exhibit inelastic demand, meaning that even slight price increases can significantly erode purchasing power. 

It is difficult to predict the precise impact tariffs will have on the poor because the amount of the tariffs and the goods they apply to keep changing. However, they are likely to include goods such as food and produce, shoes, clothing, household goods, furniture and appliances, toys, and school supplies. As Federal Reserve economist Miguel Acosta and University of Wisconsin’s Lydia Cox have shown, “tariffs are systematically higher on lower lower‐​end versions of goods relative to their higher‐​end counterparts.” The authors note that, on average, lower‐​end consumer goods are subject to tariffs four percentage points higher than their higher‐​end counterparts.

Already retailers that primarily attract shoppers with lower-incomes—such as Target, Walmart, and Best Buy—are warning of price increases if President Trump follows through on his threatened tariffs next month. 

Trump’s protestations notwithstanding, tariffs are a tax on American consumers. An analysis for the Center for American Progress, for instance, found that a hypothetical 10 percent tariff on all imports—significantly lower than Trump has proposed—would increase costs for a typical American household by $1,500 annually. Wealthier Americans can better absorb such “temporary disruptions,” as the president calls them, but again, for lower-income Americans, who have limited resources and spend a far greater portion of their income on tradable goods, that means less money for other things such as food, rent, or medicine. 

Nor is it simply a question of higher priced imported goods. Protected from price competition from imports, American producers are able to raise their prices, making it difficult for consumers to escape the added costs. And, by increasing the cost of components and raw materials, tariffs also increase costs borne by domestic producers leading them to raise prices as well. For example, by increasing the cost of steel used to make automobiles, tariffs can lead to higher priced domestically produced cars.

Of course, advocates might argue tariffs would benefit low-income Americans by making it easier for them to find work. But there is little evidence for this. Automation and other technologies eliminate far more jobs than imports, meaning the impact of tariffs will likely have minimal long-term effects on employment. A study by David Autor and others for the National Bureau of Economic Research earlier this year found that import tariffs had “neither a sizable nor significant effect on U.S. employment in regions with newly protected sectors.” They also noted that foreign retaliation for tariffs “had clear negative employment impacts, particularly in agriculture.” Similarly, the Brookings Institution found that “While tariffs benefited some workers in import-competing industries, they hurt workers in sectors that rely on imported inputs and those in exporting industries facing retaliation from trade partners.”

Democrats are hardly blameless, of course. Even now ,they leaven their criticism of Trump’s tariffs with caveats and carve outs that benefit their own favored constituencies. Joe Biden notoriously left far too many Trump first term tariffs in place.

But there is still time to resist the siren song of 19th century mercantilism. Anyone who truly cares about those Americans who are struggling from pay check to paycheck should be demanding an end to Trump’s tariffs now.