October 25 2024

Understanding Tariffs: What You Need to Know

Table of Contents

Understanding Tariffs:

Tariff wars and trade disputes are big news worldwide. It’s time to explore how tariffs affect us all, from shoppers to businesses and governments¹.

Tariffs are like taxes on things brought into a country from elsewhere. They make foreign goods more expensive, which might make people less likely to buy them². Governments set tariffs for many reasons. They might want more money, protect certain industries, or keep their country safe¹.

Key Takeaways

Tariffs are taxes on imported goods and services, which increase the relative price of imports.
Governments impose tariffs to raise revenue, protect domestic industries, and advance national interests.
Tariffs can lead to unintended consequences like higher consumer prices, reduced innovation, and trade wars.
The U.S. has historically used tariffs to protect industries, from sugar to automobiles.
Tariffs are a contested economic policy, with critics arguing they go against free market principles.

What Is a Tariff?

A tariff is a tax on goods and services from another country³. It makes imported goods more expensive, making them less appealing than local products. Governments impose tariffs for many reasons, like raising money, protecting local industries, and advancing national interests⁴.

Tariffs can be specific or ad valorem. Specific tariffs are a fixed fee for certain items. Ad valorem tariffs are a percentage of the item’s value³. For example, in April 2018, President Donald Trump set a 25% tariff on steel from most countries, except Canada and Mexico³. In March 2022, President Joe Biden changed the tariff on steel from the UK to a quota of 500,000 metric tons³.

But tariffs are not without debate. Some say they can hurt national sovereignty and lead to lower wages. Others believe they can cause trade wars and harm consumers³. Yet, tariffs are a key part of trade policy, used by governments to influence international trade⁴.

In the U.S., tariffs have been important throughout history. In 1900, they brought in over 41% of government income, but by 2013, that number was just 2%⁴. Tariffs can also affect different people differently, with lower-income families often feeling the pinch more⁵.

“Tariffs can erode national sovereignty and lead to a race to the bottom regarding wages and worker protections, while defenders believe tariffs can lead to trade wars, harm consumers, and hinder innovation.”

The debate on tariffs in international trade is ongoing. It’s clear they are a complex part of economic policy, affecting businesses, consumers, and governments⁴³⁵.

Types of Tariffs

Governments use two main types of tariffs to shape trade and protect home industries: specific tariffs and ad valorem tariffs⁶.

Specific Tariffs

Specific tariffs are a fixed fee for certain imported items. For instance, a $500 tariff on a car⁶. This method makes imported goods pricier, making them less appealing to local buyers.

Ad Valorem Tariffs

Ad valorem tariffs, by contrast, are a percentage of the import’s value. A 5% tariff on an imported good’s value is an example⁶. Like specific tariffs, they help governments control trade and shield home industries from foreign rivals.

Tariff Type	Description	Example
Specific Tariff	A fixed fee based on the type of imported item	$500 tariff on a car
Ad Valorem Tariff	A percentage of the import’s value	5% tariff on the value of an imported good

“Both specific and ad valorem tariffs are powerful tools used by governments to shape trade policies and protect domestic industries.”

Tariffs, regardless of type, play a big role in trade policies. They can greatly affect the global economy⁶⁷⁸.

Why Do Governments Impose Tariffs?

Governments impose tariffs for many reasons. One main reason is revenue generation – tariffs can bring in a lot of money for the government⁹. In the U.S., the average tariff on industrial goods is 2%⁹. In 2023, tariffs brought in over $80 billion, a small part of the U.S. government’s total income of $4.439 trillion that year¹⁰.

Another reason is protectionism – to protect domestic industries from foreign competition⁹. Over 20% of businesses fail in their first year, showing tariffs help new industries survive⁹. They help keep jobs and support key domestic sectors.

Consumer protection is also a reason for tariffs. They help stop imports that might be unsafe or harmful to the environment⁹. Tariffs are used to discourage buying international goods that don’t meet environmental standards⁹.

Lastly, tariffs can protect national security interests. Governments use them to keep critical defense industries safe, ensuring essential products are made⁹. The Chicken Tax, a 25% tariff on light trucks, was set in 1964 to counter European tariffs on American poultry⁹. It shows tariffs can help a country’s foreign policy goals.

While tariffs help some domestic industries, they can cause problems. They can lead to higher prices for consumers and retaliation from other countries¹⁰. Most economists believe free trade is better for economic growth than protectionist policies with high tariffs¹⁰.

Tariffs and Unfair Trade Practices

Tariffs can help solve many economic and national security issues. They are also key in fighting unfair trade practices. Countervailing duties and anti-dumping measures are two main tools for this.

Countervailing Duties

Countervailing duties are tariffs to balance out foreign government subsidies. These subsidies let exporters sell in the U.S. at prices lower than what they charge at home. This can hurt U.S. producers¹¹. The duties aim to make the playing field fair for U.S. companies.

Anti-Dumping Measures

Anti-dumping duties are tariffs for when foreign firms sell goods in the U.S. at prices below their home market. This is often to push out U.S. competition¹¹. These duties help ensure U.S. producers can compete fairly.

Tariffs are a key part of U.S. trade policy to fight unfair trade¹¹. They help keep a fair playing field for American workers and businesses. This protects U.S. industries from foreign competitors who get unfair government support or sell at low prices.

Measure	Purpose
Countervailing Duties	Offset foreign government subsidies that allow exporters to sell products in the U.S. at artificially low prices
Anti-Dumping Duties	Counter foreign firms selling goods in the U.S. at prices lower than they charge in their home market, often to drive out domestic competition

Using these trade remedies, the U.S. government can protect American businesses and workers¹¹. This ensures a fair global market where U.S. companies can succeed.

“Tariffs used to address unfair trade practices like subsidies and dumping are an important tool in the U.S. trade policy arsenal.”

Tariffs and National Security

Tariffs for national security are a hot topic. The U.S. government uses tariffs to protect domestic industries seen as vital for defense. But, many question if this approach is effective and right¹².

Supporters say tariffs help keep key industries strong. For instance, the Trump administration put tariffs on steel and aluminum. They wanted to keep these materials made in the U.S¹³..

But, critics say tariffs don’t always make sense for national security. They point out that higher prices for consumers and possible trade wars might not be worth it¹². They also worry that tariffs could start a trade war, hurting global stability.

There’s also debate on tariffs’ impact on national security. Some think tariffs give the U.S. bargaining power. Others believe they could harm trade relations and make the U.S. less appealing to trade with¹². The role of tariffs in national security is far from settled.

The U.S. will keep trying to balance trade policy and national security. The future of tariffs in protecting domestic industries and advancing national interests is unclear¹²¹³. Policymakers face tough choices and must consider the possible outcomes of tariffs for national security.

Understanding tariffs

Tariffs are a tool for governments to protect key industries. In the U.S., the Trade Expansion Act’s Section 232 lets the president impose tariffs on imports. This is to safeguard American industries vital to defense and the economy.

In 2018, President Trump used Section 232 to put tariffs on steel and aluminum. He said it was to protect U.S. producers, which are critical to national security¹⁴. Some argue this is protectionism, but others say it’s needed to have a reliable supply of strategic goods.

Section 232 gives the government a strong tool. It helps balance free trade with protecting essential industries¹⁴.

Tariffs and Domestic Industry Protection

Tariffs can also protect domestic industries not directly related to defense. By making imports more expensive, they help U.S. industries compete. This is called “infant industry protection.”

But, critics say tariffs can lead to inefficiencies and stifle innovation. They think tariffs should be used carefully and only temporarily. This is to avoid propping up industries that can’t compete on their own.

The debate on tariffs for national security and industry protection is complex. Policymakers must consider both sides carefully. They aim to use tariffs in a way that benefits the nation¹⁴.

Tariffs for Economic Competitiveness

Some experts think tariffs can help new industries grow until they can compete on their own¹⁵. They believe that by protecting these industries from foreign competition, they can get stronger over time. This idea comes from Alexander Hamilton, who saw tariffs as a way to boost a country’s economy.

The U.S. has used tariffs to help new industries grow¹⁶. Former U.S. trade representative Robert Lighthizer pushed for tariffs to protect U.S. industries. Former president Donald Trump also planned to use tariffs to support U.S. industries.

But, using tariffs to help the economy is a topic of debate¹⁶. Some worry about the economic effects of protectionist policies. Yet, others believe tariffs can help new industries grow and make a country more competitive in the long run¹⁶.

Measure	Impact
The US imposed tariffs on approximately $350 billion worth of Chinese imports	¹⁷
China retaliated by imposing tariffs on about $100 billion worth of US exports	¹⁷
The US raised tariffs on import transactions corresponding to about 2.6% of GDP	¹⁷
Average tariffs increased from 3.7% to 25.8% for the US	¹⁷
Trade partners imposed retaliatory tariffs on exports corresponding to about 1% of US GDP	¹⁷
China raised tariffs on about 11% of imports, affecting transactions equivalent to about 5.5% of China’s GDP	¹⁷
The Smoot-Hawley legislation in 1930 raised average tariffs from 34.6% to 42.5% on duties equivalent to 1.4% of GDP	¹⁷
Canada raised duties on a third of US exports to Canada in retaliation to the Smoot-Hawley legislation	¹⁷

The debate on tariffs for economic growth is ongoing¹⁵¹⁶¹⁷. Supporters see tariffs as a way to help new industries grow. Critics, on the other hand, worry about the risks of trade wars and protectionist policies.

U.S. Authority Over Tariffs

The U.S. Constitution gives Congress the power to regulate trade with foreign countries and set tariffs. Over time, Congress has given the president more power to negotiate tariffs. This includes tariffs for national security or to fight unfair trade practices¹⁸. This change lets presidents, from both parties, shape U.S. trade policy by raising or lowering tariffs.

Congressional Efforts to Reclaim Trade Authority

Recently, Congress has tried to take back some of this power from the president. The Bicameral Congressional Trade Authority Act of 2019 (S. 287) would limit the President’s power to impose tariffs. It would also give Congress more say in trade decisions¹⁸. The Trade Security Act of 2019 (S. 365) would make the Secretary of Defense start investigations into Section 232 claims. It also lets Congress say no in some cases¹⁸.

Chairman Grassley has proposed a plan to limit how long tariffs can last. It also wants more reporting and reasons for using Section 232. But, it needs a lot of votes and isn’t a top priority¹⁸.

Efforts to Limit Presidential Trade Powers

Other bills, like the Global Trade Accountability Act (H.R. 723) and the U.S. Reciprocal Trade Act (H.R. 765), aim to limit the president’s trade powers. The Global Trade Accountability Act would need Congress to approve tariffs¹⁸. The U.S. Reciprocal Trade Act would let the President impose tariffs and negotiate trade deals, which President Trump supports¹⁸. But, these bills face disagreements within the Republican Party and aren’t seen as key issues¹⁸.

The debate over who should have more power in trade policy shows how complex and changing U.S. trade issues are. As lawmakers and policymakers work through these challenges, we’ll see how it affects tariff negotiations in the future.

“The ongoing debate over the balance of congressional authority and presidential trade powers reflects the complex and evolving nature of U.S. trade policy.”

The Republican party wants to change some auto-industry rules and block Chinese car imports¹⁹. Trump plans to raise tariffs on Chinese goods by 60% and on other countries by 10% if he wins again¹⁹. The Democratic platform, on the other hand, aims to work with trade allies and expand global partnerships¹⁹.

The USMCA, set to expire in 2036, needs a lot of input from Congress and stakeholders before it can be extended¹⁹. It has a “doomsday clock” mechanism for reviews every six years¹⁹. New strategies, like the Uyghur Forced Labor Prevention Act, have shown to be effective in trade issues¹⁹.

If Trump’s tariffs plan goes through, it could hurt companies a lot¹⁹. Companies might use domestic sourcing, plan their country of origin, or use drawback to deal with tariffs¹⁹. They need to be ready to handle tariffs, no matter who wins the election¹⁹¹⁸.

Effects of Tariffs

Tariffs can protect some domestic industries but have big downsides. They can increase consumer costs and lead to trade wars. These wars can mess up global supply chains²⁰.

The Trump administration put new taxes on Americans through tariffs. These taxes were on products worth about $380 billion in 2018 and 2019²⁰. The Biden administration has also raised tariffs, adding $3.6 billion in taxes in May 2024²⁰.

Studies say tariffs will hurt the economy. They could lower GDP by 0.2 percent and reduce jobs by 142,000²⁰. Currently, tariffs cost US households about $625 a year²⁰.

Tariffs can also lead to retaliation from other countries. For example, China hit back with tariffs on over $106 billion of American goods²⁰. The US can also impose up to 100 percent tariffs on $7.5 billion of EU goods²⁰.

While tariffs help some industries, they often harm the economy more. They can make things more expensive, lead to job losses, and cause trade wars²⁰. Many experts think tariffs’ downsides outweigh their benefits²¹.

“Tariffs can lead to a decline in imports. The quantity of imports at £1.60 is reduced to 20 million from an initial 50 million.”²¹

Criticisms of Tariffs

Tariffs are often criticized by economists and policymakers. They say tariffs distort trade and protect inefficient domestic firms from competition²². Tariffs also hinder innovation by letting protected industries avoid constant improvement²². Higher consumer prices from tariffs unfairly burden households²².

Most economists agree that tariffs’ costs usually outweigh their benefits to certain industries²². Former President Donald Trump suggested a 20% tariff on all imports. He also proposed tariffs of at least 60% on Chinese goods and 100% on nations not trading with the dollar²². The Biden-Harris administration kept about $300 billion in tariffs on Chinese goods and added tariffs on $18 million worth of Chinese goods in strategic industries²².

Tariff policies have significantly affected consumers. Vice President Kamala Harris said Trump’s tariffs would increase household costs by $4,000 annually. Economist Adam Hersh estimated the cost to be between $2,500 to $3,000 per year²². Trump’s tariffs cost U.S. consumers $1.4 billion monthly, according to the New York Federal Reserve²².

Studies also show tariffs’ negative impact. The nonpartisan Tax Foundation said Trump’s tariffs would reduce the U.S. GDP by 0.8% and cost 684,000 jobs²². University of Chicago researchers found that each job created by protectionist policies costs consumers about $815,000 annually²³.

Many studies have concluded that tariffs’ costs outweigh their benefits. A 2019 NBER working paper on Trump’s 2018 tariffs found that the full tariff incidence fell on domestic consumers²³. Another 2019 NBER working paper on the 2018 tariffs showed a significant redistribution from foreign goods buyers to U.S. producers and the government, leading to a small net loss for the U.S. economy²³.

In summary, critics say tariffs harm free trade, stifle innovation, and unfairly burden consumers. Economists generally agree that tariffs’ costs usually outweigh their benefits.

Recent U.S. Tariff Actions

The U.S. government has made big changes in tariffs on imported goods. These changes aim to tackle economic, security, and strategic issues. They are changing how we trade with the world and how industries work in the U.S²⁴..

One big change is the planned increase in tariffs on certain products. The tariff on steel and aluminum will go up from 0–7.5% to 25% in 2024²⁴. Also, the tariff on semiconductors will rise from 25% to 50% by 2025. The tariff on electric vehicles will jump from 25% to 100% in 2024²⁴.

Another change is the tariff on lithium-ion EV batteries going up from 7.5% to 25% in 2024. The rate on non-EV batteries will increase in 2026. The rate on battery parts will also go up from 7.5% to 25% in 2024²⁴. Tariffs on natural graphite, permanent magnets, and critical minerals will also rise from zero to 25% by specific years²⁴.

The tariff on solar cells will increase from 25% to 50% in 2024²⁴. These changes aim to tackle unfair trade, national security, and boost domestic industries.

The U.S. government is also investing in domestic manufacturing. Nearly $53 billion has been invested in American semiconductor manufacturing through the CHIPS and Science Act²⁴. Almost $20 billion has been invested in expanding domestic production of advanced batteries and battery materials²⁴.

Under President Biden’s Investing in America agenda, nearly 800,000 manufacturing jobs have been created. New factory construction has doubled²⁴. These efforts aim to make American industries more competitive and reduce reliance on foreign suppliers.

The administration’s tariff approach has sparked debate. Some argue it goes against free market principles and hurts consumers²⁵. But others say tariffs are needed to fight unfair trade, protect domestic industries, and strengthen the U.S. globally²⁵.

As the U.S. deals with international trade, tariff changes and domestic manufacturing investments will shape the future²⁴²⁵.

Can tariffs replace income tax

Replacing income tax with tariffs is generally considered impractical for several reasons:

Revenue Generation

Scale of Revenue: The federal government collects a substantial amount of revenue from income taxes. For example, in Fiscal Year 2023, the U.S. collected about \$2.2 trillion from individual income taxes. To replace this with tariffs, the tariff rates would need to be extremely high, which is not feasible.
Import Volume: U.S. imports totaled about \$3.8 trillion in 2023. To generate the same revenue as income taxes, a tariff rate of around 58% would be required, assuming import levels remain constant. Such high tariffs could drastically reduce imports, further complicating revenue generation.

Economic Impact

Consumer Prices: High tariffs would significantly increase the cost of imported goods, leading to higher prices for consumers. This could reduce purchasing power and negatively impact the economy.
Trade Relations: Imposing high tariffs could lead to trade wars, with other countries retaliating by imposing their own tariffs on U.S. exports. This could harm international trade and economic stability.

Practicality

Administrative Complexity: Implementing and managing a tariff system that replaces income tax would be complex and costly. It would require significant changes to the current tax and trade systems.
Economic Efficiency: Tariffs can lead to economic inefficiencies by encouraging domestic production of goods that could be produced more efficiently elsewhere. This can result in higher costs and reduced economic welfare.

While tariffs can be a useful tool for generating revenue and protecting domestic industries, they are not a viable replacement for income taxes due to the scale of revenue needed and the potential negative economic impacts.

Conclusion

Tariffs are complex tools used by governments to shape trade and protect home industries. They might help some sectors in the short term but can harm the economy overall²⁶. The U.S. collects tariffs at 328 ports, with rates from 2.5% for cars to 6% for golf shoes. Yet, the money made ($81.4 billion last year) is much less than what comes from income taxes and Social Security/Medicare taxes²⁶.

Tariffs can lead to unexpected problems, like cutting over a percentage point off the U.S. economy by 2026 and raising inflation by 2 percentage points next year²⁶. They often hurt American companies and people, with Trump’s 20% tariff plan costing families nearly $4,000 a year²⁶. Countries like China have lost more from Trump’s tariffs than the U.S., and the retaliation has hurt jobs, mainly for farmers²⁶.

As you explore tariffs, it’s key to stay informed and grasp their complex effects²⁷. The debate on tariffs in economic policy will keep going. By keeping up and critically looking at the facts, you can make better choices and join the conversation²⁷.

FAQ

What is a tariff?

A tariff is a tax on goods and services from other countries. It makes imported goods more expensive. This makes them less appealing to people in the country where they are sold.

What are the main types of tariffs?

There are two main types of tariffs. Specific tariffs are a fixed fee for certain items. Ad valorem tariffs are a percentage of the item’s value.

Why do governments impose tariffs?

Governments use tariffs to make money and protect their industries. They also want to protect consumers from bad imports. Tariffs help advance national interests and foreign policy goals.

What are countervailing and anti-dumping duties?

Countervailing and anti-dumping duties are tariffs to fight foreign subsidies and dumping. Dumping is when foreign goods are sold too cheaply, hurting U.S. producers.

How can tariffs be used for national security?

Tariffs can be used to protect key industries on national security grounds. This is under Section 232 of the Trade Expansion Act.

Can tariffs be used to nurture “infant industries”?

Yes, tariffs can be used to help new industries grow. They are seen as a temporary measure until these industries can compete globally on their own.

Who has authority over tariffs in the U.S.?

Congress has the power to set tariffs, but it has given the president a lot of power. The president can negotiate tariff levels and impose duties in some cases.