WASHINGTON — Currently, tariffs have become a significant topic of discussion. Understanding their function and implications is crucial for comprehending the broader economic landscape.
Tariffs essentially represent a tax on imported goods. These taxes are charged based on a percentage of the amount that a buyer pays to a foreign seller. In the United States, Customs and Border Protection agents collect these tariffs at various ports of entry nationwide. Import tariffs in the U.S. vary by product; for instance, passenger cars are typically taxed at 2.5%, whereas golf shoes face a 6% tariff. Countries that have trade agreements with the U.S. may enjoy lower tariffs. For example, due to the United States-Mexico-Canada Trade Agreement (USMCA), many goods can be traded tariff-free between the U.S., Mexico, and Canada.
Mainstream economists tend to have reservations regarding tariffs, viewing them as an ineffective method for raising government revenue or boosting economic growth.
There is a lot of confusion surrounding who ultimately bears the cost of tariffs. Former President Donald Trump, a strong supporter of tariffs, claimed that foreign nations pay these taxes. In reality, it’s American companies that pay tariffs, which then funnel revenue into the U.S. Treasury. Generally, these companies increase their products’ prices to offset the added costs, which means consumers often end up being the ones who pay for the tariffs. Nevertheless, tariffs can negatively impact international markets by making foreign goods more expensive and less appealing. Some foreign manufacturers might need to lower their prices to maintain competitiveness in the U.S. market, which could reduce profits. A study conducted by Yang Zhou from Fudan University in Shanghai indicated that the impact of Trump’s tariffs on Chinese products inflicted significantly more harm on the Chinese economy—over threefold—than on the U.S. economy.
Trump has often asserted that tariffs will boost domestic job creation, reduce the federal deficit, decrease food prices, and provide funding for childcare subsidies. “Tariffs are the greatest thing ever invented,” he stated during a rally in Flint, Michigan, while he was campaigning for the presidency. Once he took office, Trump enacted tariffs aggressively, targeting a wide array of goods such as solar panels, steel, and aluminum, especially from China. He even branded himself as “Tariff Man.” Trump continues to advocate for higher and more extensive tariffs if he were to gain a second term.
In recent years, America has shifted away from its historical role as a promoter of global free trade and low tariffs, largely in response to a decline in domestic manufacturing jobs, which many attribute to unrestricted trade practices and the rise of China’s economic power.
The primary goal of tariffs is to safeguard domestic industries by elevating the costs of imports. They can also be viewed as penalties against countries that engage in unfair trade, such as providing subsidies to their businesses or engaging in predatory pricing practices. Tariffs were a principal source of government revenue before the establishment of the federal income tax in 1913. Historical records show that from 1790 until 1860, tariffs constituted around 90% of federal revenue, as noted by economics expert Douglas Irwin from Dartmouth College. However, as global trade expanded post-World War II, government revenue needs grew significantly, causing tariffs to lose prominence. In the fiscal year ending September 30, the U.S. government collected approximately $80 billion from tariffs and fees, a small figure compared to the $2.5 trillion earned from individual income taxes and the $1.7 trillion from Social Security and Medicare taxes. Despite this, Trump aims to resurrect tariff policies reminiscent of those from the 19th century.
Furthermore, tariffs can serve as a diplomatic tool for exerting pressure on other nations on various issues unrelated to trade. For instance, in 2019, Trump threatened tariffs to encourage Mexico to address the influx of Central American migrants traveling through its borders towards the United States. Trump even proposed using tariffs as a means to deter war, suggesting that he could make a simple phone call threatening a 100% tariff on any country that appeared to be considering military aggression.
Economists often view tariffs as ultimately counterproductive. They increase costs for both businesses and consumers reliant on foreign products and commonly incite retaliatory actions from other nations. The European Union retaliated against Trump’s tariffs on steel and aluminum by imposing taxes on American goods, ranging from bourbon to Harley-Davidson motorcycles. Similarly, China countered Trump’s trade initiatives by imposing tariffs on U.S. products like soybeans and pork, targeting American farmers strategically. A collaborative study involving economists from various prestigious institutions, including MIT and Harvard, concluded that Trump’s tariffs did not yield the anticipated job restoration in the U.S. manufacturing sector. In fact, despite the implementation of tariffs on imported steel in 2018, employment figures in U.S. steel plants remained stagnant at around 140,000 jobs, while retail giant Walmart employs approximately 1.6 million people.
The retaliatory tariffs imposed by China and others caused adverse employment outcomes, particularly affecting farmers, even though these negative impacts were partially mitigated by government financial assistance. The tariffs introduced by Trump also hurt companies that relied on the goods targeted by these measures. Nevertheless, while the trade war may not have succeeded as an effective policy, it did elevate political support for Trump and Republican congressional candidates in manufacturing-heavy regions like the industrial Midwest and states like North Carolina and Tennessee that are heavily invested in manufacturing.
