Conservatives in the United States have been positioning tariffs as a potent tool to boost American industry. It sounds patriotic, doesn’t it? But sometimes patriotism comes with a price. Tariffs can cause a heavy burden on U.S. consumers, increasing their household spending and causing financial anxiety.
The new U.S. President Donald Trump delayed day-one tariffs but stayed true to his campaign promise, signaling tariffs on all Chinese imports. He vowed 25% duties against Canada and Mexico starting on Feb. 1.
Tariffs generally lead to higher prices, but China could absorb some of the cost – although this has historically not been the case. Some argue that past tariffs didn’t fuel overall inflation, and that’s partially true. The Consumer Price Index rose 2.4% in 2018 but slowed to 1.8% in 2019. Price increases impact certain sectors, particularly those subject to tariffs.
But don’t mistake that for Chinese exporters footing the bill. Importers took on the burden, sacrificing their profits, but Americans still paid the price. According to the National Bureau of Statistics, 95% of U.S. tariffs were reflected in the prices of imported products as soon as they entered the American border. This means American importers paid $95 for every $100 in tariffs. Even two years later, prices remained sticky.
Research by two economists, Pablo D. Fajgelbaum and Amit K. Khandelwal, highlights why this happened during earlier trade wars: Sudden tariffs left U.S. importers stuck with pre-signed contracts, unable to adjust demand or shift the cost to consumers.
Price elasticity puzzle
In a future trade war, even with a warning, tariffs on all Chinese imports could drive overall inflation, with Trump promising to target all products, not just specific sectors. This is where price elasticity comes into play. Chinese companies can push tariff costs down to U.S. buyers in industries with rigid demand, where consumers can’t easily switch or reduce purchases of essentials, as evidence from previous trade wars suggests.
Rigid consumer behavior centered around certain products – such as ship-to-shore cranes, which the U.S. imports from China and needs for its construction purposes – almost always challenges the protectionist policy outlook since consumers end up bearing the brunt of rising tariffs. With no domestic firms producing these cranes, a 25% tariff now hits ports with at least $131 million in extra costs.
Looking ahead, the key question is how much of the tariff burden China will absorb – and for how long. Beijing is playing the long game. With the Belt and Road Initiative and stronger ties to BRICS countries, China is diversifying its trade and reducing dependence on the U.S. This makes Beijing less likely to lower prices to keep its foothold in American markets.
Alternative markets dilemma
As Trump’s trade war gains momentum, U.S. businesses will scramble to find alternatives to Chinese imports. However, this quest for new suppliers is not without its challenges. If the U.S. follows through on its threats to impose tariffs on imports from the European Union, Canada or Mexico, the cost of imports from these countries could also rise. This situation is further complicated by the fact that Russia is also under sanctions, leaving businesses with fewer affordable options.
During the previous trade war, tariffs were also applied to steel and aluminum from Canada and Mexico. As a result, domestic price indexes for competing iron, steel and steel mill products rose by 10.2% to 17.7% between February and September 2018.
What happens when there’s no escape route? Consumers stock with fewer affordable options and pay more, whether the goods come from China or somewhere else.
Supply gap dilemma
When tariffs are in play, inflation can rear its head if local production can’t fill the gap left by imported goods. Boosting domestic production is not a straightforward solution. In the previous trade war, Trump attempted to lower interest rates to dissuade industry leaders from expanding their offshore investments in production facilities and attracting capital back into the country. This strategy could help boost domestic production and partially fill the supply gap, but it’s not a silver bullet.
Since real wages in the U.S. are significantly higher compared to China, American production will always be less cost-effective.
Many American companies still produce in China, drawn by both – its cheap labor and the “In China, for China” strategy, which keeps them close to the Chinese market sphere as well as neighboring nations such as Vietnam, Malaysia and India. Even after the imposition of trade tariffs, U.S. foreign direct investment in China continued to rise. It reached $107 billion in 2018, increased to $109 billion in 2019 and grew to $116 billion in 2020. Therefore, bringing capital back can be a great rhetorical phrase, but it is out of step with economic realities.
Trump’s China policy can produce a blowback effect, making Chinese citizens more pro-domestic and protectionist in their market outlook. According to data from the China Academy of Information and Communications Technology, foreign mobile phone shipments to China dropped by 47.4% in November 2024 compared to the previous year.
As a result, Chinese consumers are likely shifting toward domestically made products, forcing U.S. companies to increase investments in China to remain competitive.
The result? A supply gap at home, inflation climbing higher and consumers left with footing the bill.
Competition and price monopoly
The lack of alternatives can lead to higher prices – even for domestically produced goods, as producers face less pressure to keep prices competitive.
When Trump imposed a 20% tariff on washing machines, the effects rippled through the market in unexpected ways. As anticipated, the price of foreign-made washing machines climbed due to the new tariffs. According to the National Bureau of Statistics, the price of washers rose by nearly 12%. However, the surprise came when prices for domestically produced washing machines also started to rise. It didn’t stop there – prices for dryers also began to increase by a similar amount.
In industries where entry of new players is tough and the size of base capital is directly linked to the longevity of a business, tariffs can take the steam off the competition. Many believe monopolies are a thing of the past in the U.S., but think again. Take March, for instance, Apple faced accusations of monopolizing the market. This is important because electrical devices are a massive slice of U.S. imports from China. In 2023 alone, items like smartphones, computers, lithium-ion batteries, toys and video game consoles comprised 27% of all goods imported from China. If tariffs hike prices and competition shrinks, consumers could see costs skyrocket in this sector.
With fewer players in the game, producers can charge higher prices and basically have a price monopoly. And here’s the kicker: If the supply line can’t be quickly ramped up, prices will rise even more. Take the example of solar panel tariffs. When a $1 tariff is placed on manufacturers, the price of installed photovoltaic panels subject to the tariff increases by $1.35. So, while tariffs are projected to protect domestic industries, they may only create higher prices for the consumer in the long run.
Import dependency problem
Besides all those critical areas, there is yet another blind spot: Raw materials prices. Some industries rely heavily on imported raw materials and tariffs on these imports can increase production costs. We saw this play out in 2018 when tariffs on Chinese goods increased input costs for many American industries.
Ford and General Motors even slashed profit forecasts in 2018, blaming higher steel and aluminum prices caused by 25% tariffs. The ripple effect hit products like nails, bumpers, tractor parts, wires and cables, forcing additional tariffs on “derivative” steel and aluminum goods by 2020.
Things may get worse as China has started to retaliate. Recently, they’ve restricted exports of key minerals like germanium and gallium, which are vital for making semiconductors, solar panels, EV batteries and infrared tech. With China controlling 94% of global gallium and 83% of germanium, finding replacements is no small feat.
2025 will be a critical year for the U.S. economic outlook. It would not just determine where American citizens will have to narrow their margins but also shape an economic order where the U.S. may be sidelined by several emerging powers to continue trading with China despite the risk of sanctions looming large.