Tariffs Would Raise Consumer Prices, Harm US Exports: Yellen

Treasury Secretary Janet Yellen speaks during a demonstration while visiting the Financial Crimes Enforcement Network in Vienna, Va., on Jan. 8, 2024. Samuel Corum/Getty Images

Tariffs would result in higher domestic prices and weigh on U.S. firms’ competitiveness to export goods, says Treasury Secretary Janet Yellen.

Yellen kicked off the International Monetary Fund and World Bank annual meetings in Washington, on Oct. 22, highlighting U.S. economic growth and lambasted international isolationism that “made America and the world worse off.”

The IMF published its October edition of the World Economic Outlook earlier in the day.

Economists forecast that the U.S. economy could expand 2.8 percent this year and 2.2 percent in 2025. Strong domestic consumer demand upgraded growth projections from the July outlook.

In prepared remarks, Yellen criticized isolationist policies.

“From day one, we rejected isolationism that made America and the world worse off and pursued global economic leadership that supports economies around the world and brings significant benefits to the American people and the U.S. economy,” Yellen said.

Yellen said tariffs would increase domestic prices and diminish U.S. competitiveness in exporting products to global markets.

Though these levies would strengthen the U.S. dollar, the senior administration official told reporters they are “a misguided approach” that would hurt exporting industries and consumers.

She said she believes the greenback remains the world’s primary reserve currency because of the country’s macroeconomic performance, solid capital markets, and the rule of law.

“There really is no other currency that I see as being a candidate in the near future to being able to replace the dollar,” Yellen said. “So, I feel confident about the dollar status.”

While the dollar’s share of foreign exchange reserves has dissipated over the last 25 years, the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data suggests that the greenback remains a dominant currency in the worldwide reserve system.

The dollar represents 58 percent of global reserves.

Yellen agreed that the federal government needs to engage in deficit reduction in the coming years. She said it is also crucial to focus on keeping the real (inflation-adjusted) net interest costs as a share of the economy below 2 percent.

Recent Treasury Department data for fiscal year 2024 confirmed that the ratio topped 3 percent for the first time since 1992.

The federal government registered a more than $1.8 trillion budget shortfall in FY 2024, fueled by growing mandatory spending and rising interest costs.

Gross interest charges—payments on public debt as well as intragovernmental payments—reached $1.13 trillion. Net interest costs—the U.S. government’s interest payments minus interest income—were $882 billion.

The Congressional Budget Office and the White House projected that the federal government will post about $13 trillion in cumulative interest charges.

Tariff Debates

Republican presidential nominee and former President Donald Trump has proposed introducing a universal 10 percent tariff and 60 percent levies on all Chinese imports.

Last week, when speaking at the Economic Club of Chicago about automobile imports from Mexico, Trump said he would install “the highest tariff in history.”

“To me, the world’s most beautiful word in the dictionary is tariffs. It’s my favorite word. It needs a public relations firm,” Trump said.

“If I’m going to be president of this country, I’m going to put a 100, 200, 2,000 percent tariff. They’re not going to sell one car in the United States.”

Vice President Kamala Harris has likened her opponent’s tariff proposals to “a sales tax on the American people.”

While the Democrat presidential contender has repeatedly criticized Trump’s position, the current administration has kept the Trump-era tariffs in place and added to the levies.

“We do not expect any changes from the Harris administration,” said Eve Lando, a portfolio manager at Thornburg Investment Management.

Both Trump and Biden’s administrations have used tariffs to level the playing field for domestic manufacturers as China dumps its heavily subsidized surplus production in the U.S. market. Without the tariffs, they said, American industries’ market share and job opportunities will keep decreasing because they can’t compete with the lower prices of Chinese products.

An August poll by the Washington-based think tank CATO Institute found that a majority of Republicans and Democrats support tariffs levied by their party but not the opposing party.

In September, the White House finalized a series of tariff hikes on various Chinese-made products.

Tariff rates will rise to 100 percent on electric vehicles and to 50 percent on solar cells.

Additionally, the United States will raise tariffs to 25 percent on aluminum, critical minerals, EV batteries, masks, and ship-to-shore cranes.

“[The] finalized tariff increases will target the harmful policies and practices of the People’s Republic of China that continue to impact American workers and businesses,” said U.S. Trade Representative Katherine Tai in a statement in September.

This past spring, Tai told reporters that the idea of tariffs raising prices “has been largely debunked.”

In March 2023, the International Trade Commission concluded: “U.S. importers bore nearly the full cost” of tariffs implemented between 2018 and 2021. The study found that domestic prices rose about 1 percent for each 1 percent increase in the tariffs.

Various administrations have embraced tariffs over the years.

In March 2002, then-President George W. Bush imposed tariffs on imported steel.

In September 2009, then-President Barack Obama instituted a punitive 35 percent tariff on Chinese tires.

For government officials, tariffs generally serve three primary purposes.

The first is to shield domestic industries, whether steel or manufacturing, from foreign competition. Proponents often accuse China and others of engaging in unfair trade practices by subsidizing their sectors and then dumping cheaper products into the United States.

The second is to reverse trade distortions. For example, anti-dumping duties are applied when foreign markets sell items at a price lower than the price in the exporter’s domestic markets.

Economists at the America First Policy Institute say foreign producers should pay the same tariff as U.S. companies.

“Foreign producers should pay the same tariffs when they import their goods as producers in the United States pay when they sell their goods abroad,” they said in a July report.

Lastly, tariffs can be a sizable revenue generator. Until the income tax was implemented in 1913, tariffs had been the federal government’s primary source of revenue. While they only account for a small portion of federal revenues, tariffs injected approximately $325 billion into government coffers.