Increased costs and/or higher prices

Importing businesses face a choice between either trying to absorb the increased cost through lower profit margins or passing it on to the end consumer in the form of higher prices, or some combination of both (assuming the foreign exporter is unwilling or unable to cut their export price to fully offset the tariff increase). Ultimately this can lead to higher consumer prices and lower corporate profits. Consumers may also experience less choice if certain imports are no longer viable.

Inflation risk

If tariffs are passed on by importers in the form of higher consumer prices, this could potentially trigger something of a spiral effect, where rising wage demands force firms to raise prices even further; this is more likely if unemployment levels are very low. Reduced competition from imports may also encourage domestic producers to raise their prices to boost profit margins.

Interest rate and cost of capital risk

By raising consumer prices, tariffs may result in central banks setting higher interest rates, particularly if the increases in inflation do not appear to be transitory or a ‘one-off’. This would mean a higher cost of capital for firms; alternatively, if tariff impositions significantly slow economic activity, the opposite could be true, as central banks look to boost growth by cutting interest rates. A mixture of higher inflation and slower growth – commonly referred to as stagflation – could also put central banks in a very difficult position. Rising inflation may make it difficult for them to cut interest rates, despite a weakening economy.

Impact on low–income populations

Tariffs often raise the price of basic consumer goods, which disproportionately impacts the poorest in society, who spend a larger share of their income on such items.

Impact on jobs

Employment levels could fall for two main reasons:

1. exporting companies may experience weaker overseas demand for their products, particularly if other countries retaliate with their own tariffs or encourage ‘buy local’ campaigns.
2. many domestic companies will face higher input costs and lower profit margins and/or weaker consumer demand, which could reduce their demand for staff, more than offsetting any increase in hiring at firms benefiting from the increased tariffs.

Impact on investment

Major changes in trade policy can result in a significant increase in uncertainty, which is not a conducive environment for long-term investment. Similarly, if firms experience lower profit margins and less consumer demand, this is likely to reduce their investment spending.

Impact on supply chains

Tariffs can lead to extended lead times due to additional import complications, customs processing delays, and due to the time taken to identify alternative sourcing. They may also result in supply chains becoming less diverse and resilient over the longer term and increase the need for better supply chain management tools more immediately.

Disproportionate impacts on small businesses

Tariffs are seen to create particular pressures on SMEs and smaller organisations as costs and reduced activity are transferred along the supply chain. This is particularly relevant given that SMEs are the largest proportion of organisations (by volume) in any economy and are a key engine for growth. SMEs that are importers will also typically have less resources to deal with the increasing costs and complexity of importing goods. SME’s also often lack the scale to re-organise their supply chains or pass on costs to customers, forcing them to either absorb costs or sometimes exit markets.

Impact on talent mobility and access to skills

Tariffs and other restrictions on trade and investment may create adverse impacts on the flow of talent across geographies as organisations favour domestic production; access to the diversity of skills that the global economy needs to grow sustainably could become an issue.

Impact on capital mobility

A more fragmented global economy, may mean that there are less capital flows across borders, or that such flows become disrupted and not necessarily allocated to where they could achieve the highest rate of return in the absence of tariffs. This could result in less access to capital for some firms and countries, and potentially lower returns for international investors.

Lower productivity growth in economies

In addition to the impacts of the negative factors highlighted above, higher tariffs could mean that countries are likely to specialize less in industries where they have a comparative advantage, whilst less overseas competition may reduce the pressure on domestic firms to innovate.

Impact on developing economies

In recent decades, many developing economies have dramatically improved their economic performance and living standards through export-led industrial strategies. The imposition of tariffs in rich countries could significantly hinder the prospects for developing countries. Global free trade provides developing economies the opportunity to drive employment and productivity gains that can significantly spur their economic growth.

Increased corruption and corporate lobbying

Generalised stresses in the global economy and on organisations creates new pressures and opportunities for fraud and corruption; pressures at border controls and with customs officials may be particularly acute. Moreover, large firms could increasingly expend resources lobbying governments to enact additional tariffs to protect them from overseas competition.