Note: This was written on Friday as an explainer, before tariffs were announced on Saturday, and before Canada and China announced retaliatory measures on Sunday, and before the tariffs were delayed for 30 days on Monday! This is a risky, high-stakes game for our economy, and theirs — as described below.

Let’s talk about how tariffs work to impact the economy – without any political considerations –just considering the potential economic consequences of tariffs, and how they impact the trade relationships between countries.
The current headlines revolve around potential tariffs that the United States would charge on goods imported from Canada and Mexico, two countries on our border with whom we already have extensive two-way trade
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What is a Tariff?
Basically, a tariff is a tax at the border on imported goods. Tariffs are already collected by U.S. customs on a variety of imported products. Customs brokers collect the tariffs from the U.S. companies that purchase the goods. That raises the costs of the goods to the ultimate consumer – unless the company absorbs the cost of tariffs, which cuts into their profits and growth and job creation.

So, if a U.S. company imports Canadian lumber or plywood to sell to homebuilders, a 25% tariff would significantly increase the cost of homebuilding in the United States – raising the ultimate price of the home, or remodeling job. These higher prices lead to inflation.

If customers can’t or won’t pay the higher home prices, it leads to a slowdown in homebuilding and remodeling projects, impacting jobs.
Perhaps the homebuilders will turn to U.S. domestic lumber companies for their supplies. But those prices would move higher, as well, since free market prices will rise to nearly match the cost of imported wood. That’s what happened when tariffs were put on imported washers and dryers. Domestic manufacturers increased prices too.

Tariffs are Two-Way Streets
But higher prices on imports are only one side of the tariff story. What happens if the country on which the tariffs are placed decides to “get even” – by putting tariffs on the goods they import from the United States?

In 2023, the United States imported approximately $426 billion from Canada. In the same year, Canada was our largest export market worth $352 billion. They bought $53 billion worth of vehicles from the United States, and $38 billion of machinery and nuclear reactor equipment, and $24 billion worth of agricultural products.

If Canada retaliates with its own tariffs, raising prices on its imports, it will hurt manufacturers in the United States who export to Canada.

Let’s take a simple case. In 2023, Canada imported $262 million worth of distilled spirits such as Kentucky bourbon and Tennessee whiskey from the United States. Suppose, because of retaliatory tariffs, the price of Kentucky bourbon goes up in Canada – and they stop drinking as much. Distillery workers in the U.S. may lose their jobs. The effect ripples through both economies, distorting prices and slowing production and impacting jobs.

Now, consider the situation with Mexico and the impact of a 25% tariff. Notable U.S. imports from Mexico include finished vehicles, auto parts, electronics, appliances, agricultural products – and beer! Last year, the United States imported $6.4 billion worth of beer from Mexico, about 84% of all imported beer. Modelo will become 25% more expensive because of tariffs, unless distributors absorb some of the costs!

We also import 86% of the tomatoes that are not grown in the United States (typically Florida and California, and only seasonally), avocados (think guacamole that you eat with your beer), and plenty of other fresh vegetables. So, tariffs on Mexican imports will raise the price of fresh vegetables in winter for American consumers.

And if Mexico retaliates by putting tariffs on U.S. exports to Mexico? In 2023, the U.S. exported $51 billion of refined petroleum products and natural gas, $45 billion of machinery, nuclear reactors and $51 billion of electronics, as well as $28 billion of cars and parts. As those goods rise in price in Mexico because of a tariff war, there will be less demand. And U.S. manufacturers/exporters will suffer.

Bottom line: It’s not just the initial tariffs that distort markets and raise prices for those who must ultimately pay the higher costs. The tariffs can trigger responses that impact not only the prices of imports but the demand for our exports, which also impacts the American economy and jobs.

The Lessons of History
The world has once before faced a dramatic round of retaliatory tariffs, initially intended to protect domestic economies. The results were disastrous. If you remember the history of the Great Depression in the 1930s, it is widely attributed to the Smoot-Hawley Tariff Act, which turned a financial and banking crisis at home into a global trade war and worldwide depression.

This time around, the consequences of tariffs could be strategic as well as economic. The United States gets 60% of its crude oil imports from Canada – despite the fact that the U.S. is now the world’s largest oil producer – because the majority of U.S refineries need Canada’s heavier form of crude oil to turn into gasoline. Tariffs on oil imported from Canada could significantly impact our domestic gasoline prices at the pump – again hitting consumers and causing inflation.

Economists on both sides of the political spectrum are arguing against the temptation to believe that tariffs punish our trading partners. In the end, they only wind up hurting Americans. And that’s The Savage Truth.