Tariffs: How They Work and What to Expect - Their Impact on Inflation and U.S. Hiring
- David Pellegrini
- Apr 9
- 5 min read
By David A. Pellegrini CEO - TPRG Talent Solutions
My name is David Pellegrini and I'm the Founder and CEO of TPRG. Tariffs are a hot topic currently. I want to take 10 minutes to really analyze tariffs and provide my opinions with history in mind.
In today’s rapidly evolving global economy, trade policies and tariffs have once again become central to debates about jobs, manufacturing, and inflation. In this post, I explain tariffs, how they work, and what to expect. Let's examine whether tariffs are inflationary, and assess their projected net impact on hiring in the United States over different time horizons. We also use the example of China’s long-term trade policies to show how tariffs work with long-term strategy attached.
How Do They Work
A tariff is essentially a tax imposed by a government on goods imported from another country. Traditionally designed to raise government revenue, reduce trade deficits, and protect domestic industries. Tariffs work by increasing the price of imported goods relative to locally produced products. As a result, the market incentive shifts toward buying domestic products, which in turn can help domestic manufacturers expand their operations.
Tariffs are typically calculated as a percentage of the value of imported products (known as ad valorem tariffs), though they can also be charged at a fixed rate per unit. Importantly, while U.S. customs authorities collect tariffs from importing companies, these costs are generally passed on to consumers through higher retail prices. This dynamic is sometimes at the center of debates about whether tariffs cause inflation.
What to Expect
The concern that tariffs inevitably spark sustained inflation is common; however, a growing body of research, and history over the last 50 years, indicates that any inflationary effects tend to be modest and transitory. For example, an analysis by the Federal Reserve Bank of Boston estimated that tariffs imposed in 2018 added only about 0.1 to 0.2 percentage points to core Personal Consumption Expenditures (PCE) inflation under the “constant-dollar” markup assumption. When examining more extreme scenarios, even upper-bound estimates remain within a range that many economists view as manageable over time.
Moreover, as tariffs result in reduced consumer spending power, they may also dampen broad-based demand—thus limiting longer-term inflationary pressures. This means that while short-term price increases are observed, these effects are offset as the economy adjusts.
“Our estimates suggest that although tariffs tend to raise import prices in the short term, the long-run impact on overall inflation is minimal, especially as reduced demand counteracts initial price hikes.”
The Net Outcome for U.S. Hiring Over Different Time Horizons
There is ongoing debate about how tariffs ultimately affect employment in the United States, particularly in manufacturing—a sector that can be both directly and indirectly influenced by trade policy. Current projections, influenced by dynamic adjustments in supply chains, point to a nuanced picture:
Over 12 Months: In the short term, uncertainty arising from new tariffs may cause some hesitation among businesses. However, early indications suggest that domestic manufacturers begin to invest in reshoring production to avoid tariff costs. This modest uptick in domestic hiring is expected to be relatively small (roughly a 0.2–0.5% increase), as companies adjust to new pricing structures and supply chain changes.
Over 36 Months: With a medium-term perspective, as companies finalize decisions to bring production back onshore and benefit from the cost advantages of locally sourced inputs, the positive impact on hiring should become more pronounced. Experts forecast that manufacturing-related hiring could increase by approximately 2% or more over this period. Furthermore, as manufacturing strengthens, the multiplier effect spills over into related sectors such as logistics, legal services, and business support.
Over 60 Months: In the long run (five years), the net outcome for U.S. hiring is expected to be even more favorable. Reshoring initiatives could result in substantial gains in domestic manufacturing jobs, alongside an overall improvement in job quality and wages for the middle class. This period also allows time for innovation and investment in advanced manufacturing technologies, further bolstering competitiveness and job creation. While precise figures depend on a range of macroeconomic factors, the trajectory points to stronger growth and lower long-term wage suppression as the benefits of protection and a reduced trade deficit become evident.
“Dynamic studies show that positive shifts in domestic production—when properly managed—eventually translate into significant job multipliers, with every manufacturing job supporting between 5 to 7 additional jobs in the supply chain and related services.”
The Case of China: A Model of Strict Trade Policy
China presents an instructive example. For nearly 50 years, China has maintained a strict trade policy regime—including tariffs and non-tariff barriers—that has been credited with protecting nascent industries and fostering rapid industrialization. Interestingly, in some periods, despite high tariffs, China has experienced deflation rather than inflation. This outcome is partly due to the country’s broader policy framework that tightly controlled domestic consumption and shifted surplus savings into productive investment and global asset accumulation.
In this context, tariffs helped China nurture domestic manufacturing and gradually reduce reliance on imports, which boosted economic competitiveness and stabilized prices. For the United States, the lesson is that carefully designed and managed tariffs may not lead to runaway inflation, and—when combined with supportive industrial policies—they can encourage the return of manufacturing jobs.
“China’s experience over the past half-century illustrates that tariffs, when part of a broader trade strategy, can yield deflationary pressures and spur domestic industry rather than triggering sustained inflation.”
Tariffs, Reshoring, and the Broader Economic Picture
One of the critical arguments in favor of tariffs is that they help stem long-term trade deficits by incentivizing domestic production and reducing reliance on imported goods. Persistent trade deficits are problematic because they lead to wealth transfers from domestic consumers and workers to foreign asset holders, reinforcing economic vulnerabilities. By encouraging manufacturing to return to shore, tariffs contribute to:
Middle-Class Strengthening: Reshoring often means more stable, well-paying jobs in manufacturing and supporting sectors, which bolsters the middle class.
National Security: A robust domestic manufacturing base reduces dependency on foreign supply chains, particularly for critical goods, thereby enhancing national security.
Reduction in Wealth Drain: By narrowing trade deficits, the outflow of wealth to foreign investors is curtailed, ensuring that more resources remain in the domestic economy.
“Long-term trade deficits effectively transfer wealth from domestic consumers to foreign creditors. In contrast, domestic production reinforces fiscal sustainability, as increased manufacturing leads to better pay, job stability, and a more balanced national income distribution.”
My Conclusion
Tariffs are more than just a tax on imports, they are a multifaceted policy tool. While critics argue that tariffs raise prices and cause inflation, research and some prominent history indicates that any inflationary effects tend to be modest and are largely offset by decreased demand and increased domestic production. The projected net outcome on U.S. hiring shows that—if managed correctly—tariffs can drive a gradual return of manufacturing jobs over 12, 36, and 60 months. Drawing on China’s example, decades of targeted protectionist policies have not resulted in runaway inflation; on the contrary, they have sometimes even coincided with periods of deflation, all while bolstering domestic industries and reducing dependency on imports.
Ultimately, carefully calibrated tariffs can enhance national security, strengthen the middle class, and improve the long-term trade balance, helping ensure that the wealth generated at home remains with American workers rather than being siphoned off to foreign asset holders.
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