Tariffs Primarily Burden Domestic Consumers, Dampen Growth, and Weaken Currency, Economist Warns

WASHINGTON D.C. Tariffs, often presented as a protective measure for domestic industries and a tax on foreign manufacturers, largely function as a tax on local consumers, with foreign producers absorbing only a minimal portion of the cost. This assessment comes from economist Alex Krüger, who recently highlighted the multifaceted negative economic impacts of such trade barriers.

In a social media post, Krüger stated, "Tariffs, touted as a tax on foreigners and a shield for domestic industries, are primarily a tax on local consumers, with foreign manufacturers absorbing only a small fraction of the cost." Economic analyses consistently support this view, indicating that the burden of tariffs is predominantly borne by consumers through higher prices for imported goods and even domestically produced alternatives.

Experts from institutions like UC Davis and the Federal Reserve Bank of Richmond concur, noting that tariffs increase the cost of goods by embedding additional taxes into prices, which are then passed on to consumers. This can lead to a higher overall cost of living and reduced purchasing power. Studies on past tariff implementations, such as those in 2018-2019, found that the full incidence of tariffs largely fell on domestic consumers and importers.

Beyond consumer impact, Krüger emphasized that tariffs act as a "self-imposed economic constraint," hindering long-term growth for both the imposing nation and the global economy. He added, "In the absence of a protracted tariff war, tariffs slow the pace of economic expansion without altering the trend." This perspective is reinforced by economic models suggesting that tariffs can lead to reduced productivity, misallocation of resources, and a net loss to the economy.

Furthermore, Krüger pointed out that tariffs tend to weaken the local currency, specifically citing the U.S. Dollar in the current context. While the direct link between tariffs and currency depreciation can be complex, trade protectionism can lead to decreased trade volumes, reduced foreign investment, and increased economic uncertainty, all of which can exert downward pressure on a nation's currency.

Despite these economic headwinds, Krüger observed that markets eventually adapt to the presence of tariffs, normalizing the discomfort over time. He concluded, "Hence why tariffs eventually cease to matter for the direction markets." However, this adaptation does not negate the underlying economic inefficiencies and costs imposed by such policies.