Enrique Mendoza, a professor of economics in the School of Arts & Sciences, explains what tariffs are and unpacks their potential short- and long-term effects.
2 min. read
As of August, the estimated average effective U.S. tariff rate hovered around 16%, a sharp uptick from the 2.3% rate at the end of 2024. And according to those who pay close attention to such numbers, the rates are expected to keep increasing.
Enrique Mendoza, a professor of economics in Penn’s School of Arts & Sciences, explains that tariffs function like a tax, and it can be a tax on consumption. Unlike taxes, tariffs can be applied to the components that firms buy to build goods, such as rare minerals, called tariffs on intermediate goods.
Consumers will see the effects of these tariffs in the near future, says economics professor Enrique Mendoza, but predicting which items will see a price increase is tricky.
Image: Yinwei Liu via Getty Images
Traditionally, Mendoza says, “tariffs usually address what we call market failure—an over-production of a particular good, say, or a country not appropriately offsetting the cost to the environment. You use a tariff to try to bring it to its true social cost. In another scenario, a country may be unfairly supporting some industries by subsidizing them, so then you try to offset that with a tariff.”
Economists say an economy that has zero tariffs is fully open to international trade, explains Mendoza. “The U.S. has traditionally been one of the countries most open to trade; until recently, average tariffs were below 5%.” The most recent round of tariffs, however, make it understand the rationale because, Mendoza says, “the government has made many different arguments.”
“For instance,” he explains, “the government says that Mexico isn’t doing enough to reduce drug trafficking, so they’re going to use tariffs for geopolitical reasons to accomplish something that they think is of merit or value. Also, because our trade deficit with Mexico is too big, they say they want to use tariffs to reduce the trade deficit. That’s just one example. But situations like this breed a lot of uncertainty. And it’s not just the change in the size of the tariffs, but that the government keeps moving the posts as to the rationale for why the tariffs are being imposed.”
Consumers will see the effects of these tariffs in the near future. “[Retailers] will start increasing prices fairly soon in response to the tariffs. So that’s the price of appliances and big-ticket items bought from abroad. The government has been very selective about the specific items subjected to tariffs, so it also makes it hard to predict.”
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