Now that Donald Trump has secured another presidential victory, tariffs are on the horizon as a cornerstone policy. While many discussions are focused on the overall dollar cost Americans will shoulder, it’s essential to recognize that there are multiple hidden costs attached to tariffs. Understanding these costs could offer a clearer picture of what’s at stake for Americans, and why these policies may be more damaging than anticipated.
The Total Cost Burden on American Households
Proposed blanket tariffs of up to 20% on imports and 60% tariffs on Chinese imports are projected to be almost entirely borne by American consumers representing both firms and individuals. Estimates project that these costs will exceed $2,600 annually per average U.S. household, according to a study by the Peterson Institute.
But why are costs so high? A primary reason lies in the fundamental economic principle of comparative advantage, a foundational concept in international trade theory. Comparative advantage teaches us that countries are better at producing some things than others and that when countries are able to specialize in what they do best and trade with others, both parties to the exchange benefit.
Which is why problems arise when governments interfere with the free exchange of goods and services. The latter disrupts the efficient allocation of resources in the U.S. economy, or any economy. As tariffs are primarily borne by U.S. firms, and given that over 14 million American jobs rely on trade, businesses will face increased costs, leading to reduced availability of goods and services, lower incomes, job losses, and decreased economic output.
Ultimately, these factors contribute to the estimated $2,600 annual cost per U.S. household, emphasizing the substantial economic burden imposed on American consumers. However, the economic burden of tariffs extends beyond the direct costs imposed on consumers.
The High Opportunity Cost of Tariffs
When a nation diverts resources towards domestic production that could be more efficiently sourced abroad, it sacrifices the opportunity to allocate those resources to more productive efforts. Which hits the second important part of comparative advantage – opportunity costs.
Economist Thomas Sowell explains this best in his book Basic Economics. He says, “The key to understanding international trade is the basic economic reality of scarcity.” In simple terms, scarcity means we only have so much time, labor, and resources. High tariffs ignore the fact that it can be cheaper for U.S. Businesses to trade internationally and more expensive to trade domestically. When the government raises the cost to trade internationally, that means that those opportunities to expand your business, hire labor, or make the investments necessary for your business to grow – will now be forgone. That’s why economists like me study the ‘opportunity cost’ – the next best thing you could have been doing if you didn’t have to pay for the expensive price of tariffs.
This leads us to our third point. The costs that tariffs have on your economic liberty.
The Impact on Economic Liberty
Perhaps the least visible but most far-reaching cost of tariffs are the restriction they impose on your economic freedom. At their core, tariffs are a form of government intervention, directly intervening with who Americans can trade with and how much it should cost to do so.
Therefore, tariffs are what I call a “Government Knows Best Trade Policy.” It implies government knows better than you whom you should trade with, how much it should cost you, and in what quantities you should trade with them.
But it is not the government’s role to tell you with whom you should be able to trade with, only for government to make it more costly for you should you decide to trade internationally. The decision of whom to trade with and at what price should ultimately rest with individuals and businesses.
Finally, free trade and liberty go hand in hand. Arguments against free trade are arguments against individual liberty. Even George Fitzhugh, an individual who despised free trade said, “Admit liberty to be a good, and you leave no room to argue that free trade is an evil—because liberty is free trade.” If we accept that freedom is essential, then we must recognize that restrictions on trade, like tariffs, are in direct opposition with this value.
Conclusion: The True Cost of Tariffs
Tariffs impose costs beyond the direct costs on American consumers —they come with a high opportunity cost and a high cost on your economic liberty.
Historical evidence consistently demonstrates that nations that are open to trade and investment tend to see long-term economic growth and higher living standards. While countries that rely on high tariffs and trade restrictions distort their economies and stunt their growth.
History repeatedly shows us that economic growth is stronger when trade flows freely. Therefore, trying to produce everything domestically, in the name of protecting U.S. jobs, is not economically advantageous. It’s an economic myth.
Tariffs never make goods cheaper. Only free trade can.