Is There Anything Good to Say About Tariffs?

Tariffs, which are taxes on imported goods and services, were once the government’s only source of revenue.

It was supplanted by income taxes, which were first collected in 1913. Then, after World War II, 23 nations signed the General Agreement on Tariffs and Trade (GATT) to reduce tariffs and promote international trade. Between 1947 and 1993, these agreements reduced average tariffs on the world’s industrial goods from 40 percent of their market value to less than 5 percent.

But tariffs were revived in 2018-19 when President Trump imposed them on goods from China. Washing machines, solar panels, steel, aluminum, and a billion dollars of other goods were affected. For the most part, the Trump tariffs were kept in place by the Biden administration, though modified in 2023.

What Is the Purpose of Tariffs?

Tariffs are intended to raise revenue for the U.S. from other nations’ exports.

They’re also intended to protect domestic industries by raising the cost of competitive imports.

Lastly, they can exert political leverage over another country, pressuring them to reduce their imports or lower their own tariffs. The Trump tariffs were meant as retaliation for China’s unfair trade practices and theft of U.S. intellectual property. It was also hoped they’d help correct the trade imbalance: As of 2018, America had purchased $376 billion more goods from China than China had purchased from us.

As of March of 2024, the tariffs have brought in revenues of $233 billion.

The Drawbacks of Tariffs

Retaliation

Ideally, tariffs are intended to protect domestic manufacturers from cheaper alternatives imported from countries with cheaper labor, more abundant resources, or more advanced manufacturing.

But tariffs can operate in both directions. A tariff imposed by the U.S. on an imported good can lead to retaliation from exporting nations. For example, to give a competitive edge to domestic car makers, the U.S. has imposed a 2.5 percent tariff on automobiles imported from the European Union. The EU has retaliated by putting a 10 percent tariff on all cars from the U.S.

Minimal Revenue

The tariffs haven’t been particularly beneficial to the Treasury. By 2020, U.S. tariffs on Chinese goods had risen from 5 percent to 20 percent, a large enough increase to be considered a “trade war.” But the import duties collected raised the amount of federal revenue from tariffs only from 1 percent to 2 percent.

There’s also the problem of scale. The $80 billion raised on import duties in 2023 sounds impressive until you realize that it represents only 2 percent of the $4.44 trillion in federal tax revenue.

Consumers, seeing tariff-increased prices on imports, will purchase a less expensive alternative, which translates into even lower tariff-raised revenues.

Even more revenue is sucked away by subsidies. When the U.S. raised tariffs, China, Mexico, and the European Union retaliated with their own tariffs on U.S. agricultural products. To aid farmers, the government paid out significant subsidies. By 2020, the Treasury had accumulated $66 billion from the China tariffs and paid out $61 billion in bailouts to farmers, with the government retaining only .08 percent of the tariff revenues.

Indirect Taxes

The biggest objection to tariffs is that they are, in effect, a sales tax on Americans because importers of foreign goods typically pass on the added cost to their customers.

In a perfect world, a foreign company would respond to a tariff by lowering the price of its exports by an equal amount. For instance, the exporter of shoes who faces a new duty of six percent would lower the price so that, as far as the consumer is concerned, the cost of the shoes (the lower cost plus the tariff) is the same as the cost before the tariff was imposed.

Unfortunately, in our imperfect world, the exporter does not reduce the price of their goods. They ship their shoes to the American importer, who may pay the tariff, but more often will pass it on to consumers. And price tags will now reflect the price of the shoes plus the added cost of the tariff.

Do Tariffs Help or Hurt?

Opponents of the tariffs predicted that they’d hurt domestic industries and impede growth, but the numbers don’t support this. In 2018, the Trump administration imposed tariffs on solar cells and panels from overseas. These tariffs were kept in place by President Biden and extended for four years. Yet the construction of solar arrays supporting utilities was up in the third quarter of 2023 and showing a 107 percent increase over the previous year.

Meanwhile, the price of solar panels has dropped steadily, not because of tariffs but because of overproduction in China. Overproduction of other tariffed imports from China has also reduced their prices, according to the Coalition for a Prosperous America.

And the Inflation Reduction Act has encouraged investing in domestic production of solar modules, freeing us from total reliance on foreign manufacturers.

Industry  Week notes that tariffs on washing machines raised prices only temporarily. The same is true for steel, which is now showing signs of increased production here in the U.S. And China’s ban on some agricultural products grown in America was eventually reversed. China is buying more American soy than ever.

Tariffs can still have a large impact on markets, but markets can grow despite them. Given a vibrant global economy, exporting nations work through or around them to keep growing.