Special Tuesday Bulletin: Tariffs

What are they? When are they used? What does this mean for the United States economically?

With the overwhelming amount of discourse surrounding tariffs these days, we decided to do a Special Bulletin of The Capitol Hill Reader to keep you informed. We will still have our usual Wednesday Reader tomorrow (about Presidential Pardons).

Some questions to be answered in this article include:

• What are tariffs?

• When and why are tariffs used?

• What does this potentially mean for the United States in the future?

• Can tariffs ever be a viable economic strategy, or are they only a form of detrimental protectionism?

As always, we strive to bring you accurate, concise information. Have any suggestions or critiques? Let us know!

What are tariffs?

By definition, a tariff is “a tax imposed by the government of a country or by a ‘supranational union’ on imports and exports of goods” [1]. A supranational union is a type of international organization that is empowered to hold more authority over its member states than traditional treaties, a good example being the European Union [2].

Basically, this is a tax imposed by a country or group of cooperating countries on goods (manufactured things like appliances and cars, raw materials, commodities, alloys, etc) being moved in and out of their borders via trade. This is an attempt to control the flow of foreign products so that consumers will then (theoretically) buy domestic products instead, regardless of these products being more expensive.

Tariffs can be fixed or variable:

• Fixed Tariffs are those that hold the same price per unit of imported goods, or a fixed percentage of the price per unit of the imported / exported goods.

• Variable Tariffs are those that hold a different price, or a variable price, depending on the price of the imported / exported goods.

How would this look in practice? Say a country wanted to impose trade tariffs on imports from several countries. A fixed tariff would be something like 25 percent of the total price of the goods themselves, or a fixed price, regardless of how much the goods cost. A variable tariff would be something like a range of 10-40 percent of the total price of the goods, or a variable price, depending on how much the imported goods cost [1].

Tariffs are not a new concept, and since we here at The Capitol Hill Reader are history nerds, we will now share some examples from history:

**Author’s note: we are aware that not all of these examples resemble modern tariffs.

• The ancient Athenian port of Piraeus placed a 2 percent levy on grain imported through their waters, while Athens itself placed restrictions on the transport of grain so that it could only be moved through Piraeus [1].

• In 14th century England, Edward III banned the import of woolen cloth in order to jump start the local industry [1].

• The Tudor monarchs would later take this to the next level, developing a complex system of “protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage, and other means of government intervention” to mold England into the leading wool-producing country in the world at that time [3].

• During the 18th century, Great Britain, in an effort to further their fledgling manufacturing industry, imposed tariffs on imported manufactured goods while reducing tariffs on imported raw materials (so that they could be used for manufacturing) and subsidizing the export of products made in Great Britain [1,3].

• The United States imposed “The Tariff of 1789,” which was actually the first piece of legislation passed after the ratification of the US Constitution. It had three main purposes: to support the government, to protect the manufacturing industry, and to help pay down the federal debt [4].

• More recently, the America First policies of Donald Trump’s first presidential term resulted in “The Trump Tariffs:” a series of tariffs first imposed on Chinese imports and later expanded to imports from the European Union, Mexico, Canada, and many more. These included tariffs on solar panels and washing machines of 30-50 percent, steel at 25 percent, and aluminum at 10 percent [5]. In response, many countries imposed retaliatory tariffs on US goods. Eventually, the steel and aluminum tariffs on Mexico and Canada were lifted, though President Trump again threatened to impose tariffs on Mexico on an increasing basis unless they stopped all illegal migrants from entering the US. This was later canceled after negotiations [5].

So with all of these examples in mind, what patterns do we see in regard to tariff use?

Why do countries use tariffs?

Usually, it boils down to protectionism.

What is protectionism?

By definition, protectionism refers to an economic policy that restricts imports in order to protect domestic industry; this can be done through a variety of means, such as tariffs, import quotas (a physical quantity of goods that can be imported), and other regulations [6, 7]. Ostensibly speaking, this seems like a reasonable idea: preventing cheaper goods from entering a nation, goods made in places that may not have as much regulation and therefore cheaper labor costs, should force consumers to turn towards more expensive, domestically produced goods. This should hopefully then spur domestic industry growth in response to the increased domestic demand. Or at least this is the thought process many protectionists navigate.

But again, why would a government do this? Isn’t the act of importing and exporting goods indicative of a healthy, freeish-market economy? Sometimes. But other times, countries engage in strategies to break into foreign markets, strategies that could prove disruptive to local industry. Strategies such as “dumping.”

What is dumping in terms of economics?

Dumping is when a country exports goods and sells them in another country at a lower price than customers pay in the originating country [8]. Wouldn’t the businesses in the exporting country lose a bunch of money by selling at a deficit? Yes, but usually the government of the originating country offers subsidies to businesses to help compensate them for losses incurred [8]. The economy in the receiving country then has to compete with cheaper goods and, because of this, governments impose tariffs on said goods, both as an equilizer and as a deterrent.

A recent example of dumping would be China’s ongoing practice of exporting steel at far below market price [11].

Does this work?

Eh…it’s complicated. There is near-total consensus among economists that tariffs are “self-defeating and have a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth” [1,9,10]. A 2019 report by the National Bureau of Economic Research titled The Impact of the 2018 Trade War on U.S. Prices and Welfare found that “import tariffs were costing U.S. consumers and the firms that import foreign goods an additional $3 billion per month in added tax costs,” and that under both the Biden and Trump administrations, trade war tariffs have cost American taxpayers hundreds of billions of dollars [11,12]. They also found that domestic companies often raised their prices significantly due to less international competition, particularly impacting rural areas (though this was eased to a degree by subsides) [12]. Another report called Who’s Paying for the US Tariffs: A Longer-Term Perspective, this time by the American Economic Association, wrote the following:

Using another year of data including significant escalations in the trade war, we find that the costs of the US tariffs continue to be almost entirely borne by US firms and consumers. We show that the response of import values to the tariffs increases in absolute magnitude over time, consistent with the idea that it takes time for firms to reorganize supply chains. We find heterogeneity in the responses of some sectors, such as steel, where tariffs have caused foreign exporters to drop their prices substantially, enabling them to export relatively more than in sectors where tariff pass-through was complete [13].

Interestingly, despite a wealth of data pointing to these economic consequences, the Biden Administration kept and expanded upon Trump’s tariffs, particularly with Chinese electric vehicles and batteries [11].

Taking all of this into consideration, it’s a little more complicated than deciding whether or not tariffs “work,” but something that we can say with certainty is that they negatively impact domestic companies and consumers more than those in the foreign nation exporting the goods. In other words, when the United States Government imposes tariffs on imports, US consumers and companies will bear the brunt of the cost [1,11,12,13].

What are President-Elect Donald Trump’s proposed tariffs? How could they affect us?

President-Elect Donald Trump has proposed a number of tariffs, most notably a 10 to 20 percent tariff on all imports and a 60 percent tariff on all imports from China. This differs from previous Trump tariffs that were for specific products and that did not apply to all imports [11]. The stated purposes for these new tariffs vary widely, but they mainly focus on reducing the national debt through tariff revenue and funding initiatives like childcare.

There are some issues with this plan:

• Tariffs reduce imports; a lot of the time, this is the reason that tariffs are implemented (see above), to reduce the flow of foreign goods into a country [11,12]. If there are less imports coming in, then there will be less revenue to be had from tariffs on these imports, shifting the burden of this policy further onto the domestic consumer. Add in the certainty that other countries will impose retaliatory tariffs, and one can see how this situation can very quickly get muddled and complicated.

• Domestic industries will need to spend a lot of money to change how they conduct business, usually in response to the new market reality (for example, updating supply chains). Industries need to fully embrace this new reality with fervor, and many will not want to comply.

• Tariffs raise prices for the consumer. It is a verifiable fact. Also, local price trends do not always respond in ideal ways to tariffs. Sometimes, higher prices are just higher prices, and industry actually shrinks due to people spending less and everything being generally more expensive to make.

So, if Trump were to implement all of his proposed tariffs, citizens of the United States could be heavily affected; the scope of this effect hinges on personal consumption patterns, whether or not someone owns a business that relies on current supply chains, etc. There’s also a solid chance that domestic industry would not respond as intended and would actually shrink. Can we say this with 100 percent certainty? Of course not. We are still talking in hypotheticals. No one knows what tariffs, if any, will be implemented next month when President Trump is sworn into office.

That said, it’s always good to stay informed.

Thanks for reading the special bulletin! Check out our post tomorrow on Presidential Pardons.

THANK YOU!

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Works Cited:

1.) https://en.wikipedia.org/wiki/Tariff

2.) https://en.wikipedia.org/wiki/Supranational_union

3.)https://web.archive.org/web/20210308192131/https://www.cepal.org/prensa/noticias/comunicados/8/7598/chang.pdf

4.) https://en.wikipedia.org/wiki/Tariff_of_1789

5.) https://en.wikipedia.org/wiki/Trump_tariffs

6.) https://en.wikipedia.org/wiki/Protectionism

7.) https://www.aeaweb.org/articles?id=10.1257/pandp.20201018

8.) https://corporatefinanceinstitute.com/resources/economics/dumping/

9.) Krugman, Paul; Wells, Robin (2005). Microeconomics. Worth.

10.) https://www.nytimes.com/2015/04/26/upshot/economists-actually-agree-on-this-point-the-wisdom-of-free-trade.html

11.) https://www.axios.com/2024/09/28/how-tariffs-work-trump-china

12.) National Bureau of Economic Research Report: The Impact of the 2018 Trade War on U.S. Prices and Welfare. 2019.

13.) https://www.aeaweb.org/articles?id=10.1257/pandp.20201018