LEILA FADEL, HOST:
For more on how trade negotiations affect the U.S. economy, we've got economist Philip Luck on the line. He served as the deputy chief economist at the State Department in the Biden administration, and is now the director of the Economics Program at the Center for Strategic and International Studies. Good morning, Philip, and welcome to the program.
PHILIP LUCK: Good morning. Thanks for having me.
FADEL: So could you just parse out what the economic impact of the actual tariffs we're talking about would be versus the impact of the stops and starts to the way the administration is rolling these tariffs out?
LUCK: Yeah, absolutely. And that's a perfect question because there's two things here.
FADEL: Yeah.
LUCK: There's the economic harm of the actual tariffs, which is big and substantial and definitely something we should care about. Estimates suggest that prices would go up by about 7% for your average American consumer. This will hit things like apparel and shoes the hardest, the things that we, you know, import large shares of.
And it would decrease GDP by about $200 billion a year annually. That's sort of our estimates, if you think about those Liberation Day tariffs. But to your point, in some sense, while that's really important, it's missing the bigger point that all of this stop and start, will they, won't they, is creating enormous amounts of uncertainty that even if the tariffs never go into place, is creating real harm for the economy.
FADEL: Now, is the threat of tariffs an effective way to make trade deals with allies?
LUCK: I think the broader question, I would say, is to what end? I would say the first thing is, this is not the traditional way (laughter) you make trade deals, right?
FADEL: Right.
LUCK: You know, taxation is the purview of Congress. Any durable, long-lasting change in tariffs needs to be passed by Congress. And that's a way to make these trading regimes and the tariff rates long lasting and resilient and have everybody, including firms who are trying to make big investments, have certainty about the environment they are looking at in the future.
What the president is doing is using sort of emergency powers to create, you know, the administration has called it leverage. I would call it coercive leverage to try to get concessions from partners. In the short run, that can be effective. I mean, we're the largest economy in the world. If we want to try to impose harm on another economy, we can do it.
We can get concessions. But I would say, at what cost, right? You know, we're losing a lot of credibility and a lot of faith in our trustworthiness as a partner, and that's going to be harder to come back from.
FADEL: Now, we've had stories on this program about U.S. businesses that are welcoming tariffs because it will make them more competitive and let them charge higher prices compared to other businesses. And we've had stories from businesses that are afraid of what the higher costs will do to their bottom line. Is there an answer for a way for tariffs to be a net positive for all American businesses?
LUCK: The important point here is these are a distortative policy, right? They're going to help some people and harm others. So you're always going to be able to find people who are going to benefit from this. What I would say is, you know, generally speaking, taxes distort economic behavior. So unless you have a clear goal that - for implementing the tariff, it's probably not a great idea.
Now, that goal can be revenue, which this administration has as a goal. Now, under the best case scenario, tariffs, even the liberation tariffs, will only be about 5% of government revenue. So this is never going to be a big piece of revenue. But you could try to protect certain strategic industries, but there's always going to be a big harm to the global economy.
FADEL: Philip Luck is the director of the CSIS Economics Program and Scholl Chair in International Business. Thank you for joining the program.
LUCK: Thanks a lot.
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