Tariffs: The Good, The Bad, and the Ugly

Donald Trump campaigned on heavily using tariffs as a cornerstone of his economic and foreign relations plans. He recently announced that his goal would be to enact 25% tariffs on Canada and Mexico, along with an additional increase of 10% for tariffs on China.

What does this mean for you?

A tariff is a tax applied to goods imported from another nation. There are a few implementations of tariffs. The most common form, and the approach Trump’s tariffs will take, is ad valorem, a fancy Latin phrase for percentage-based tariffs. A 10% tariff means a $100 item would have a $10 tax.

Importers of goods pay the tariff, not the foreign nation. If you import shirts for $4 and sell them to businesses for $7, when a tariff of 25% is added to the shirts, your cost will be raised to $5. You, in turn, increase the price that you sell to businesses, who then raise the price they sell to consumers.

A tariff is a tax primarily paid for by the people of the country enacting it.

There are a few reasons countries enact tariffs.

The Good

The first is to combat unfair trading practices. In this situation, a foreign nation either heavily subsidizes a given product or exports it cheaper than it is sold at home. This tariff aims to ensure that the prices of those goods rise to fair market value so that they don’t undermine businesses in the home country.

President Biden used this justification to impose tariffs on electric vehicles and green energy technology coming from China. Green energy is not only the power of the future but also the economy of the future. Countries that can become leaders in developing green energy technology will be prosperous, and China is subsidizing its products to make it difficult for other nations to compete.

The flip side of unfair trading practices is to give your up-and-coming industries a leg up. Suppose a nation wants to get a foothold in a cutting-edge industry. It might give its businesses a competitive boost by raising the prices of other countries’ products until the companies have established themselves enough to compete on their own.

Over the last several decades, US manufacturing has moved overseas to countries with cheaper labor. There has been a renewed focus on bringing manufacturing back to the US, and tariffs, such as those on semiconductors, can help this transition. America is actively constructing microchip factories, but those companies need time to become competitive.

Finally, there are national security concerns. If a particular product or resource is vital to our nation’s security, we don’t want to rely on trade to meet such a critical need. Tariffs are enacted to ensure there is always enough domestic supply.

Trump used this reasoning to increase steel and aluminum tariffs on many nations. Later on, the USMCA (the modern version of the North American Free Trade Agreement) eliminated those tariffs on Mexico and Canada. Then, when Biden took office, they were eliminated for EU nations.

Tariffs can quickly go too far, hurting instead of helping.

The Bad

Early in the Great Depression, lawmakers were looking for solutions to America’s crisis. In June of 1930, President Herbert Hoover signed the Smoot-Hawley Tariff Act into law, enacting tariffs on over 20,000 goods despite a letter signed by over 1,000 economists urging him not to.

The tariffs enacted were the second highest in US history, intending to protect American workers during this difficult time. The problem was that the US had a trade surplus; we were exporting more than we were importing. Other nations protested and retaliated against our tariffs, causing our exports to decrease by 18-31%, depending on the country. Canada enacted tariffs on 30% of US exports and expanded their economic relationship with Great Britain.

Ultimately, the Smoot-Hawley Tariff Act worsened the Great Depression instead of improving it.

There are modern examples of this as well. Trump enacted tariffs on $360 billion worth of Chinese goods. China retaliated with tariffs against US agricultural products, requiring Trump to bail out American farmers with $13 billion. Soy exports have never recovered because China changed its reliance on US soybeans during these fights. How helpful is a tariff if it raises consumer prices and causes taxpayers to bail out industries hurt by retaliation?

The Ugly

The most recent announcement by Trump was that on day one of his presidency, he would enact a 25% tariff on Mexico and Canada. The reason is that he wants those two nations to stop migrants and fentanyl from getting to America.

This doesn’t fit into any of the reasons for tariffs discussed above. Instead, it uses tariffs more like sanctions, meant to intentionally penalize nations for issues unrelated to the costs of goods. (It is also worth noting that Americans are the ones smuggling in fentanyl and do so through legal ports of entry, China is the producer of fentanyl precursor chemicals, and migrant crossings have decreased significantly this year.)

Using sanctions this way invites retaliation, and Mexico has already said it would do just that. Mexico is the second largest importer of American goods and imports twice as much as China, the third largest importer. Canada is the largest.

Tariffs are not a magic bullet that solves all of our problems. They are one of many economic tools that must be used minimally and correctly to have a positive impact.

https://www.cfr.org/backgrounder/what-are-tariffs#chapter-title-0-2
https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act

https://www.cfr.org/backgrounder/naftas-economic-impact

https://www.reuters.com/markets/us-farmers-back-trump-face-pain-china-tariff-threats-2024-11-07/

https://www.politico.com/news/2020/07/14/donald-trump-coronavirus-farmer-bailouts-359932