A Beautiful Word? The Facts About Tariffs

A tariff is an excise tax levied on items produced abroad as they enter the taxing country. In economic terms a tariff can be represented as a combination of two things: a tax on domestic consumption and a subsidy for domestic production.

Normally, tariffs are passed on to domestic buyers as higher prices. Domestic producers can charge domestic buyers the international market price plus an amount equal to the tariff because that is the cost of competitive foreign products. Detailed studies of the 2018-19 U.S. tariff increases verify this happened. Thus, tariffs result in a one-off bump in price levels. (This is not an increase in inflation, except during the period in which the bump occurs.)

Promoters of tariffs often claim that they can boost employment in tariff-protected industries. However, overall job-growth effects for tariffs are problematic. For example, employment in the steel sector has not changed much since the imposition of the 2018 tariffs. But producers that use steel have seen cost increases that harm their international competitiveness and job growth.

In fact, studies show that the 2018 tariff increases are associated with reduced manufacturing employment because of related supply-chain issues, reduced competitiveness, and imposition of retaliatory tariffs by countries exporting to America. Although trading countries may choose otherwise, import tariffs usually lead to retaliation. For example, when President Trump imposed tariffs during his first term, China retaliated by leveling tariffs on American agriculture and other industries. The fallout from that included increases in U.S. farm subsidies, which over 2018 to 2020 nearly equaled the entire amount of China-derived tariff revenues. Also, China started buying agricultural products from other nations and today imports more corn from Brazil than from America.

Despite their general drawbacks, tariffs can support various governmental policy goals, especially non-economic ones. A few examples:

• Tariffs can provide additional government revenues. (Ignoring possible effects of retaliation and reduced output potential, a roughly 25% tariff on all U.S. imports from all countries would offset the revenue loss from extension of the Tax Cuts and Jobs Act provisions scheduled to expire at the end of 2025.)
• Tariffs, imposed or threatened, can be used as a foreign policy hammer, particularly when the importance of trade between trading partners is asymmetric. For example, getting Colombia to repatriate its citizens deported from the United States.
• Tariffs can be used to promote domestic production from industries deemed necessary for national security—e.g., steel, aluminum, semiconductors.
• When a government wishes to exert influence over the foreign exchange value of its currency without direct intervention in currency markets or changes to its domestic interest rates, it can use tariffs and/or export taxes and subsidies instead.