Understanding Tariffs and Their Impact on Trade and Economics

What Are Tariffs and How Do They Work?

Tariffs are taxes imposed by governments on imported goods and services, typically calculated as a percentage of the price paid by the buyer to a foreign seller. In the United States, these taxes are collected by Customs and Border Protection agents at one of the 328 ports of entry across the country. Tariff rates vary depending on the product; for example, passenger cars are taxed at 2.5%, while golf shoes face a 6% tariff. However, countries with which the U.S. has trade agreements often enjoy lower or no tariffs. Until recently, most goods traded between the U.S. and its neighbors, Canada and Mexico, were tariff-free under the U.S.-Mexico-Canada Agreement (USMCA).

Tariffs have long been a tool for governments to regulate trade, but they remain a topic of debate. While they can generate revenue and protect domestic industries, mainstream economists often view them as an inefficient way to address trade imbalances or raise funds. The U.S., for instance, collected about $80 billion in tariffs and fees in the fiscal year ending in September 2023, a small fraction compared to the $2.5 trillion generated from individual income taxes.

The Misconception About Who Pays Tariffs

One common misunderstanding about tariffs is who bears the cost. President Donald Trump and other proponents of tariffs often claim that foreign countries pay them. However, the reality is that tariffs are paid by importers—American companies—and the revenue goes directly to the U.S. Treasury. These companies often pass the added expense on to consumers in the form of higher prices. As a result, it is ultimately U.S. consumers who foot the bill for tariffs.

Tariffs can also harm foreign economies by making their products more expensive and less competitive in the U.S. market. For instance, foreign companies may lower their prices to offset the tariffs, cutting into their profits to maintain market share. A study by Yang Zhou, an economist at Fudan University in Shanghai, found that Trump’s tariffs on Chinese goods caused three times as much economic damage to China as they did to the U.S. economy.

Trump’s Stance on Tariffs

President Trump has been a vocal advocate for tariffs, touting them as a solution to various economic and political challenges. During his presidential campaign, he referred to tariffs as “the greatest thing ever invented” and adopted the nickname “Tariff Man.” Under his administration, the U.S. imposed tariffs on a wide range of imported goods, including solar panels, steel, aluminum, and Chinese products. Trump has argued that tariffs will create factory jobs, reduce the federal deficit, lower food prices, and even fund initiatives like childcare subsidies.

However, the U.S. has shifted away from its post-World War II role as a champion of global free trade. This shift is largely a response to the decline of U.S. manufacturing jobs, which many attribute to unrestricted trade and China’s rise as a manufacturing powerhouse. Trump has continued to pursue higher tariffs in his second term, embracing a policy that resemblesthe 19th-century model of relying on tariffs as a primary revenue source.

The Purpose of Tariffs: Protection and Pressure

Tariffs are primarily used to protect domestic industries by making imported goods more expensive. They can also punish foreign countries for unfair trade practices, such as subsidies or dumping products at artificially low prices. Historically, tariffs played a significant role in U.S. revenue. From 1790 to 1860, they accounted for 90% of federal revenue, according to Dartmouth College economist Douglas Irwin. However, their importance declined after World War II as global trade expanded and governments needed larger revenue streams.

In addition to economic goals, tariffs can serve political purposes. For example, Trump used the threat of tariffs to pressure Mexico into cracking down on migration from Central America. He has even suggested that tariffs could prevent wars, claiming that the threat of 100% tariffs would deter foreign leaders from engaging in conflict. Despite these claims, economists remain skeptical about the effectiveness of tariffs as a policy tool.

The Economic Impact of Tariffs: A Mixed Bag

While tariffs are intended to boost domestic industries, they often come with unintended consequences. They increase costs for companies and consumers who rely on imports, leading to higher prices for goods and services. Additionally, tariffs frequently provoke retaliation from other countries. For instance, the European Union responded to U.S. tariffs on steel and aluminum by taxing American products like bourbon and Harley-Davidson motorcycles. Similarly, China imposed tariffs on U.S. soybeans and pork, targeting Trump’s political base in agricultural states.

A study by economists from the Massachusetts Institute of Technology, the University of Zurich, Harvard, and the World Bank found that Trump’s tariffs failed to restore jobs in the U.S. manufacturing sector. For example, despite tariffs on imported steel, the number of jobs in U.S. steel plants remained unchanged at around 140,000. Meanwhile, retaliatory tariffs from other countries had “negative employment impacts,” particularly for farmers. These effects were only partially offset by government aid provided to farmers.

Despite their limited economic success, tariffs have had political benefits for Trump. The study found that support for Trump and Republican candidates increased in regions most affected by the tariffs, such as the industrial Midwest and Southern states like North Carolina and Tennessee.

Conclusion: The Complex Role of Tariffs in Trade Policy

Tariffs are a controversial tool in international trade, with both proponents and critics presenting strong arguments. While they can protect domestic industries and generate revenue, they often lead to higher prices for consumers, spark trade wars, and fail to achieve their intended economic goals. The U.S. has moved away from its historical role as a champion of free trade, but the effectiveness of this shift remains unclear. As global trade continues to evolve, the debate over tariffs will likely persist, highlighting the need for a balanced approach that considers both economic and political realities.