Donald Trump has yet to enter the Oval Office for his second term officially, but his threat of tariffs is already raising concerns about the economic harm it could impose. If enacted, Trump’s trade agenda will counter his promises of American energy dominance and lower energy bills for American families and businesses.
On the campaign trail and since the election, President Trump has threatened to use tariffs in many ways. He called for a 10-20 percent tariff regardless of the country or origin, tariffs on specific countries like China, tariffs on specific products like electric vehicles, and tariffs on American companies that move overseas. More recently, he vowed to impose a 25 percent tariff on all Canadian and Mexican goods and a 100 percent tariff on BRICS countries if they move away from the dollar. BRICS is made up of Brazil, Russia, India, China, and South Africa. Egypt, Ethiopia, Iran, and the United Arab Emirates have recently joined as members, with several other countries expressing interest.
What materializes into policy remains to be seen. Trump has previously used the threat of tariffs but has also implemented $80 billion in taxes on imported goods in his first term. Because, at their core, tariffs are a hidden tax on consumers, artificially inflating prices on imported goods and their domestic alternatives. When a government imposes a tariff on foreign products, the immediate effect is straightforward: imported goods become more expensive. If the incoming administration enacts these tariffs, everything from food, phones, cars, clothes – and energy – will get pricier.
Take oil, for instance. According to the latest U.S. Energy Information Administration data, Canada comprises 58 percent of crude oil imports. The second largest provider? Mexico. One reason that crude oil trade works efficiently is that America’s Gulf Coast refiners made massive investments in refining heavier crude from Canada. The U.S. can export its lighter crude abroad. Since oil is a globally traded commodity, more supply in the global market helps lower prices at the pump at home.
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As Al Salazar, head of macro oil and gas research at Enverus Intelligence, told Politico, “I don’t think there’s any other significant competition to serve this heavy crude if I’m a U.S. refiner. I mean, I’m only getting it from Canada. I’ve always been getting it from Canada. So if I’m them, I’d probably pay that tariff and then pass that 25 percent I paid right to the consumer.”
If the tariffs take effect, gas prices rise. When energy prices rise, everything else does, too, because nearly everything we make requires energy.
Critically, the economic harm extends far beyond just a price increase on the product incurring the tariff. A company producing appliances in the United States might rely on specialized parts from multiple countries. When tariffs increase the cost of these inputs, the manufacturer must either absorb the higher costs or pass them on to consumers. This is true not only for big box stores like Ikea but also for American energy producers. If the price of materials required to build nuclear power plants, solar arrays, and pipelines increases, these projects could become uneconomic or more expensive when households and businesses pay their energy bills.
The seen and unseen costs of higher tariffs would seriously damage the U.S. economy. Businesses would face more paperwork and compliance costs, particularly harming small businesses. Consumers and businesses could face even higher costs from retaliatory tariffs. This tit-for-tat pattern can quickly escalate into broader trade conflicts that damage international business relationships built over decades. The broader economic harm would be slower economic growth and hundreds of thousands of jobs lost.
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Tariffs create a particularly insidious long-term effect by reducing the pressure on domestic companies to innovate and improve efficiency. When businesses are sheltered from competition, they often become complacent, investing less in research and development, new technologies, and process improvements. This diminished innovation makes domestic industries less competitive globally over time (Jones Act and Foreign Dredge Act, anyone?). Domestic producers, facing less competition from abroad, could raise their prices as well, knowing consumers have fewer affordable alternatives.
Even the threat of using tariffs as a negotiating tactic has costs. Businesses must scramble to figure out how it could impact their bottom line. Maybe this is all part of the art of the deal, and Trump will claim victory (rightly or wrongly) that this tactic helped secure the border and kept BRICS on the dollar. However, if the administration moves forward with the tariffs, it will be a raw deal for Americans and most U.S. businesses.
The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.
