Will Tariffs Rekindle the Inflation Flame?

The Trump administration is betting on a repeat of the 2018-19 tariff success.

Since President Donald Trump unveiled the contours of his April 2 Make America Wealthy Again universal baseline and reciprocal tariffs, economists have debated whether this will rekindle the inflation flame. Market watchers have presented a diverse array of projections, from a negligible effect to sky-high prices. But the White House says look to the 2018-19 round of tariffs to determine the fate of US prices.

Tariffs and Water

Shortly after the United States commemorated Liberation Day, senior administration officials performed the media rounds, defending the president’s actions. One of these was Commerce Secretary Howard Lutnick, who has been Trump’s top salesman, dating back to the 2024 election campaign. Appearing on CBS News, the Wall Street billionaire veteran espoused the potential inflation trends that could unfold in the months or years to come, citing water as an example.

“When tariffs come into place, foreign goods may become a little more expensive, but domestic goods do not. So if you’re looking at Poland Springs water [made in Maine] versus something — let’s say, Fiji water [made in Fiji] — the Poland Springs is not going to be more expensive. So for the first time in your lives, you’re going to actually think about the Americans who make the products, the Americans who produce these products and work in these factories.”

Lutnick also referenced the inflation data from a few years ago, when Trump first introduced wide-ranging tariffs on imports entering the United States. “When Donald Trump was the president last time, he put on tariffs. And if you go back and look at that news, everybody said, ‘Oh my gosh, oh my gosh!’” he added.

Tariff proponents have presented similar arguments in the public square, claiming that higher import duties will facilitate consumers’ transition to US-made products. Additionally, they will usually comment on what transpired during Trump’s first term in the Oval Office.

Because Lutnick is an incredible and convincing talker, it would be easy to believe what he says. This past fall, even CNBC anchors were smitten with Lutnick’s logic on levies, taken aback by his explanation for why it is critical to impose sweeping tariffs. However, a slightly deeper dive into the economic literature would contradict his pontification.

First, the idea that American-made products would not become more expensive is fallacious. By removing Fiji water from the US marketplace, there is one less competitor that might deliver a cheaper alternative to domestic options. By eliminating one extra choice in the water market, US brands can increase their prices because consumers cannot flee to other brands. Moreover, comparable to the famous Milton Friedman pencil lecture decades ago, corporations worldwide rely on foreign markets for supplies, whether plastic from India or silicone from Brazil.

Second, it is misleading to suggest that there was no inflation during 2018-19. In the aggregate, consumer price inflation was minimal throughout the president’s first four years. However, there are a few things to address on this subject. First, the Trump administration granted thousands of exemptions to US and foreign manufacturers, offering relief at the consumer and wholesale levels. Second, businesses refrained from passing the full costs of tariffs onto shoppers (the divergence between the consumer price index and the producer price index is sizable). Third, tariffs operate with a lag effect, meaning it could take a couple of years to travel through the marketplace. If there were no pandemic, would tariff-fueled inflation have happened?

Specific industries have lauded the Trump administration for its tariffs, though some have questioned why the White House targets places like Canada. Nevertheless, the steel and aluminum sector has been ebullient because these firms will be shielded from outsiders, allowing them to act with reckless abandon, whether raising prices or restricting competition. The issue with protectionism, especially with well-connected industries, is that the downstream sectors usually suffer. Studies show that the 2018-19 tariffs greatly benefited steel, accounting for a small portion of the US economy. However, the downstream victims intensified as steel- or aluminum-consuming businesses endured higher costs, fewer workers, and less output.

Reordering the World Order

Lutnick has proclaimed that Trump is “reordering” global trade. Does it require an overhaul? It certainly does for many downtrodden Americans living in abandoned towns that were once manufacturing powerhouses and drivers of national prosperity. During the 1992 presidential campaign, independent candidate Ross Perot warned of the “giant sucking sound” that would transpire from abysmal government-managed trade agreements as factories, capital, and jobs traversed south of the border. While critics will claim that MAGA Country would not work in facilities producing Nike sneakers or screwing together Apple iPhones, low- and middle-income Americans in the Rust Belt would beg to differ.

That said, this seismic shift in worldwide commerce will likely come with economic pain, primarily in higher prices for smartphones and apparel. And, yes, consumers will pay more for Poland Springs water. Is it worth it? American voters will determine this during the 2026 midterms.