The current administration is implementing a protectionist trade policy that will be harmful to higher education and its students. Tariffs will increase prices, pushing costs up for colleges and universities as well as for families. These price increases are likely to be regressive, hurting lower-income families more than higher-income ones. When the effects of tariffs are combined with those of other policies of this administration, such as changes to visa policies expected to reduce the number of tuition-paying international students, increases in endowment taxes and cuts in research funding, many colleges and universities will have little choice but to reduce financial aid. As a result, we can expect educational attainment rates to slide, reducing the supply of skilled labor to the workforce and thereby harming the overall economy.
The president has frequently stated that “tariff” is one of his favorite words and a policy that will contribute to American prosperity. Most mainstream economists disagree. Years of evidence from the 20th century in Latin America and Africa, where countries pursued import-substitution policies to promote economic development, support these economists’ conclusions. Those policies involved imposing tariffs on imports to protect domestic producers from competition from foreign companies producing better, cheaper products. America’s own experience in the 1930s with the Smoot-Hawley tariffs offers further evidence. Instead of promoting growth, protecting domestic producers can lead to low productivity, weak demand for labor, high prices for consumers, rent-seeking on the part of protected producers and those seeking protection, and overall declines in well-being.
What does this have to do with higher education? In addition to its likelihood of decreasing the country’s overall economic performance, tariffs will raise prices for colleges, universities and families while also increasing income inequality. If we want a stronger economy with a skilled, educated workforce to advance U.S. leadership, tariffs are moving us in the wrong direction.
Let’s dive into six of these direct (and interrelated) impacts.
First off, tariffs will increase prices for colleges. The consensus view is that prices will rise in response to the tariffs and that inflation will rise as well, particularly if the Federal Reserve is pressured into a more expansionary monetary policy than would be justified by a weakening economy. Price increases and inflation both present challenges for colleges and universities by reducing their purchasing power. They will face higher prices for construction projects (both new buildings and maintenance of existing buildings) as wood and steel prices increase. Other price increases to watch will be those affecting vehicles; food, including the prices of avocados and coffee (staples of college food services); and textiles (increasing the costs of athletic gear). Utility prices are expected to rise. Unlike state sales taxes, which nonprofits in many cases are not required to pay because of their tax-exempt status, colleges and universities will be paying the higher prices resulting from tariffs.Students and their families will also face these price increases, making it more challenging for them to afford expenditures on higher education. Wages and incomes won’t immediately increase to offset these rising costs, making families worse off. This explains much of the unhappiness with the previous administration.
If wages do start going up in response to price increases, those sectors that aren’t protected by the tariffs and that can’t raise their prices will be worse off. They will face increasing labor costs, but without the ability to compensate with higher prices. Higher education falls into this category, since many families are already finding it challenging to afford the cost of attendance.Staff and faculty will also face higher prices for the goods they buy, but, per No. 3, their employers won’t easily be able to raise their prices (tuition) to make it possible to increase their salaries. Or, if they do raise wages, they will have to find other places to cut expenditures. Colleges and universities are very labor-intensive, with about two-thirds of their budgets allocated to compensation, so it is difficult to find places to generate adequate savings.Financial aid is one obvious place to look for savings, since it is also often a significant expenditure, but this of course worsens affordability for the students that colleges are recruiting. Those colleges and universities with deep applicant pools may as a result shift to admitting a greater share of higher-income students.
Finally, tariffs stand to compound challenges facing higher education by contributing to income inequality. Tariffs are a tax on consumers, just like a sales tax, except they fall on a subset of goods. According to the Yale Budget Lab, tariffs are regressive and have their biggest impact on lower-income families: Per their calculations, the level of tariffs proposed as of July 30—they keep changing—would translate into the bottom 10 percent of the income distribution experiencing a 3.5 percent reduction in disposable income. The rest of the bottom half of the income distribution will see about a 2 percent reduction, and the top decile only a 1 percent reduction. This will worsen the affordability challenges already facing low- and middle-income families and the colleges and universities that are recruiting these students. Federal financial aid will not increase to offset this impact, and new limits on borrowing will mean that some families will not be able to borrow.
Colleges and universities are already facing a variety of financial challenges—beyond tariffs—making it difficult to allocate more resources to need-based aid. Many will face reductions in international students, reducing tuition revenues. Some will be hit by the increased endowment tax. And many will be affected by the limits on borrowing that will prevent some students from matriculating and paying tuition.
Many of the challenges facing higher education, particularly the more selective private nonprofit and public colleges and universities, have resulted from the 40 years of rising income inequality in America. This has resulted in increasing tuition and costs as institutions compete for higher-income students who are willing to pay for the services they desire. In turn, this makes it more challenging to fund financial aid for those lower-income students and families whose incomes have not risen as quickly. The regressive impact of the current administration’s tariff policies on income distribution will only worsen these trends.
At a moment when America should be investing in higher education to meet the demand for skilled labor on the part of employers, add tariffs to the list of administration policies that are working in the wrong direction. All Americans should care, because this will reduce our economic growth going forward and weaken our competitive position relative to other countries around the world.
