How Significant Are 15% Tariffs? Enough to Increase Inflation, Yet Not Enough to Shift Production to the US

How significant is a 15% tariff on imported consumer goods? It's substantial enough to cause an increase in consumer inflation, yet not substantial enough to encourage a shift in production to the US. While investors might express "good cheer" over tariffs averaging 15% instead of a much higher rate, the end result will be higher inflation rather than an expanded U.S. manufacturing sector, which was the primary aim of Trump's tariff policy.

The Trump administration recently reached several trade agreements with major trading partners, implementing a 15% tariff on a broad array of imported goods, many of which are consumer items.

Is that significant? According to consumer price index data, prices for consumer goods, excluding food and energy, were unchanged from 2000 to 2020. However, they rose by nearly 15% in 2021 and 2022 due to product shortages and supply disruptions stemming from the pandemic. Consequently, a potential 15% price hike on non-energy and food consumer goods is notably large, as it matches the total price increase over the past 25 years. There is no doubt that consumer prices for these goods will increase over time as these tariffs are factored into the pricing structure.

However, is the 15% tariff hike on consumer goods significant enough to compel companies to relocate production to the US? While it might attract some new investment, the cost difference between manufacturing in the US and other countries vastly exceeds 15%. Additionally, the expenses associated with new investments, as well as the time required to secure locations, acquire permits, and finish construction, are considerable. By the time these processes are completed, many of these tariffs might be eliminated under a new administration.

Assessing the results of Trump's tariff policy will take months and years, but it is very probable will lead to increased consumer inflation and minimal changes in global manufacturing.