What to Keep in Mind: Trump’s Tariffs

Tariffs graphic


Before we get along any further, let’s clarify what a tariff is. 


From the Council on Foreign Relations;


“Tariffs are a form of tax applied on imports from other countries. Economists say the costs are largely passed on to consumers


Countries have used them to protect domestic industries, such as agriculture and renewable energy, as well as to retaliate against other states’ unfair trade practices.”(1)


There is a third paragraph that I want to come back to but before I do, a little history lesson is in order. 


Tariffs go back to, at least, Athenian Greece. The port of Piraeus imposed tariffs on grained other goods via a levy of two percent, to raise taxes for Athens. There were also restrictions on money landing and grain transport was only allowed through the port of Piraeus. This is, I think, the earliest example, and it’s less about national protectionism as tariffs would commonly be used for than as a way to increase revenues regionally. Athens was a city state, as opposed to a country, after all. Thus, the scope and impact might be limited in area, but the market effect would be to ensure reasonable prices for Athenian citizens.


“Chiefly because of the need for certain imports, such as grain and timber, and for revenue drawn from taxes on trade, many cities did hav an interest and involvement in overseas trade. Athens in particular made laws that prohibited the export of grain produced in Athens and required that loans on trading venture be for cargoes of grain and that ships bringing grain into the Piraeus sell one third of it on the spot and the remaining two thirds in Athens. Athens also instituted special courts to expedite the adjudicate of disputes involving traders, granted honors and privilege to anyone who performed extraordinary services relating to trade for the city, and made agreements with other states to obtain favorable conditions for those bringing grain to Athens.


“In all the aforementioned examples Athens’ chief interest was to supply itself with imported grain so that its citizenry could obtain food at reasonable prices.” (2)


At this level and at this time in history, tariffs don’t seem so bad. Indeed, they’re quite useful and international trade during the time of Classical Greece was robust and national economies were solid, if not booming.So this is our first example of tariffs, but where the costs don’t seem to be borne by the consumers. A tax on imported grain makes some kind of sense, if it means that domestically produced grain which is not exported retails at affordable cost at market.


There is a major caveat in referring to Ancient Greece as an economic model; the Finlay model holds that Ancient Greek economy was fundamentally different from our contemporary market economy. It also differed in quality and economic transactions were subordinate to social and political activities. “Economic activity was necessary in this system online in so far as the individual male citizen had to provide sustenance for himself and his family. This could be accomplished simply by farming a small plot of land. Beyond that, the male citizen was expected to devote himself to the wellbeing of the community by participating in the public religious, political, and military life of the polis.” (3)


We see tariffs used for national protectionism during the 14th century under Edward III, when tariffs were levied on imported wool. He was followed by Henry VII who increased export duties on raw wool. His successors, Henry VIII and Elizabeth I ‘used protectionism, subsidies, distribution or monopoly rights, governement-sponsored industrial espionage and other means of government intervention to develop the wool industry, leading to England became [sic] the largest wool-producing nation in the world.” (4)


By the 18th century, Britain was using tariffs as a part of the strategy for large-scale infant-industry development. Tariffs were imposed on imported raw materials used for manufactured goods and export duties were abolished on most manufactured goods. (5) This was the first instance of such policies and would be used in East Asia after the Second World War. Britain shifted to free trade more by the 1870s after the push in the late 1840s to shift over was successful. The economy continued to grow but was behind both the post-Civll War U.S. and Bismarck’s Germany. The U.S. had entered its first major protectionist period and Germany and the rest of Europe rejected the free trade model, as well.


Discussion ensued about introducing fiscal retaliation in the form of high import duties on goods from other countries who imposed high tariffs. This would have meant a return to tariffs, but that didn’t happen unit the Depression and by that time, it was too late for Britain to regain her economic or industrial standing. 


Now interestingly, before the new post-colonial United States developed a revenue tax, as a new government, it decided to impose tariffs on imports with the Tariff of 1789. After  the Embargo Act of 1807, though, we get a sense of where tariffs can go wrong. An embargo is not a tariff, but the effect can be similar. In this case, “the Act prohibited the import of all kinds of manufactured imports, resulting in a huge drop in US trade and protests from all regions of the country.”(5)


I don’t want to drill down any further - but I do recommend learning more about tariffs and their place in both national and world history - except to point out that the U.S. repeatedly utilized tariffs as the principal economic protection tool. By the time the country had caught up with and began to surpass European industrialization, tariffs were no longer used for protectionism, so it was said, but to uphold “the American standard of wages for the American workingman.”(6)


So far, we have a pretty good idea of the history of tariffs in the U.S., but let’s go into this a little more. We get that tariffs are a form of protectionism, that ideally tariffs can be used to protect certain industries snd even protect against unfair trading practices. This is worth taking a closer look at.


“For instance, the United States applies ‘countervailing duties’ when another country subsidizes a domestic industry — allowing its exporters to sell products at a lower price than they would otherwise be able to in a free market — and thereby undercuts U.S. producers. ‘Antidumping’ tariffs are applied when a U.S. firm proves that a foreign firm is selling products in the Unites States at lower prices than they charge at home, often in an attempt to drive competitors out of an industry before raising prices. In both of these cases, tariffs are meant as a penalty that allows domestic producers to compete as if the market had not been distorted. Critics, however, claim that even these tariffs are often disguised protectionist policies.” (7)


On this last note, it’s instructive that even the Cato Institute called out “dumping” has “everything to do with naked, costly protectionism.”(8) I haven’t even gotten to the costs of tariffs in general, and the projected costs of the tariffs Trump is proposing yet, but when the Cato frames something in these terms, it’s worth paying attention. 


Here’s where things get interesting, though. “In 2018, under the auspices of Section 302 of the Trade Act of 1974, the Office of the U.S. Trade Representative (USTR) issued a report detailing how China’s intellectual property (IP) practices were ‘unreasonable or discriminatory, and burden or restrict U.S. commerce.’ These included pressuring American companies to hand over their IP as a condition for doing business in China, known as forced technology transfer. On the basis of the report, Trump imposed a slew of tariffs, ultimately covering roughly $360 billion worth of imports from China. The Biden administration has mostly kept these tariffs in place.”


Note that the Biden administration “has also used Section 310 to impose tariffs. In May 2024, he used the authority to target $18 billion worth of Chinese goods, including steel and aluminum, semiconductors, and electric vehicles and other green technologies — sectors that CFR expert Brad W. Setser says are viewed as ‘critical for America’s economic future.’ Analysts say the administration imposed these tariffs to protect the United States’ burgeoning green energy industry from a glut of subsidized Chinese products.” (9) 


Additionally, Trump raised tariffs on steel and aluminum from China, as well as on allies from the EU and Canada. Tariffs on Canada and Mexico were later dropped and Biden lifted the tariffs on EU countries. Trump invoked Section 232 of the Trade Expansion Act of 1962 allegedly for national security reasons (which the Act was designed for); however, this was “particularly controversial, …because it exploits an exception to WTO rules for actions taken in the name of national security” (10)


Tariffs have been supported by both Trump and Biden administrations as tools for “reducing the U.S. trade deficit and bringing manufacturing jobs back to the United States.”(11) Note that Trump did not bring jobs back to the country, though under the Biden administration, domestic job production in manufacturing surged.


All of this might sound anodyne and it might be that the average voter — and certainly the average Trump voter — doesn’t grasp the implications and ramifications of who pays for tariffs. 


The opening paragraphs from a working paper from the national Bureau of Economic Research may help locate the terrain we’re about to enter.


“In general, economists believe that freely-functioning markets best allocate resources, at least absent some distortion, externality or other market failure; competitive markets tend to maximize output by directing resources to their most productive uses. …[T}here are market imperfections, but tariffs — taxes on imports — are almost never the optimal solution to such problems. Tariffs encourage the deflection of trade to inefficient producers, and smuggling to evade tariffs; such distortions reduce welfare. Further, consumers lose more from a tariff than producers gain…[italics mine}. The redistributions associated with tariffs tend to create vested interests, so harms tend to persist. All these losses to output are exacerbated if inputs are protected, so this adds to production costs.


“…[T]here are strong theoretical reasons that economists abhor the use of protectionism as a macroeconomic policy; for instance, the broad imposition of tariffs may lead to offsetting changes in exchange rates. And while the imposition of a tariff could reduce the flow of imports, it is unlikely to change the trade balance unless it fundamentally alters the balance of saving and investment. Further, economists think that protectionist policies helped precipitate the collapse of international trade in the early 1930s, and this trade shrinkage was a plausible seed of World War II. So, while protectionism has not been much used in practice as a macroeconomic policy (especially in advanced countries), most economists also agree that it should not be used as a macroeconomic policy.” (12)


A couple of things likely pop out at us here. One is that I’m not sure how theoretical it is that the international levying of tariffs led to the worldwide depression of the 1930s. Almost every nation in Europe as well as the United States employed tariffs as national protectionism. This drove inflation and costs of living higher and precipitated economic collapse such as evidenced in the Stock Market Crash of 1929. Second, the framing of tariffs as macroeconomic policy assists us in zooming out from the nearsightedness of employing tariffs as solutions — temporary or not — to domestic economic issues. NBER’s paper is worth a read and a PDF is available for download from their site.


But let’s get back to who is most affected by tariffs. This is what I’ve been leading up to and as we look at Trump’s proposals, it’s difficult to see precisely any net positive that’s going to come out of this.


“Importers pay tariffs to their home government, but most economists find that the bulk of tariff costs are passed on to consumers. This is particularly true for industries with small profit margins, such as retail. Critics say poor Americans are hit the hardest, and recent research has found that U.S. consumers have indeed ‘borne the brunt’ of the tariffs on Chinese goods through higher prices. Still other studies have pointed to different costs for consumers: with tariffs on their foreign competitors, domestic producers can safely raise their prices. Ultimately, consumers share the burden with importers.” (13)


I want to pause and reflect on the note that “with tariffs on their foreign competitors, domestic producers can safely raise their prices.” This may at at the crux for why so many Trump voters supported him. Inflation has been down to record levels and wages have actually increased, but corporations — in almost every sector — have been able to raise prices with little oversight or restriction. The Biden administration deserves applause for enforcing caps on medications and had there been a Harris win, it was apparently on the docket to pass legislation that would have forced companies to limit price hikes. We will never know. As it is, expect prices to go up, not down and the price of eggs is not going to get any lower.


“Many experts challenge the logic behind tariffs and argue that they hurt more industries than they help, saying that tariffs act as an economic drag in the countries using them. When consumers pay the bulk of tariff costs, it makes them effectively poorer because prices are higher.


“According to this view, firms that use domestic products as inputs also see their purchasing  power shrink, as tariffs allow domestic producers to raise prices. For example, as automakers pay more for steel, economists suggest they are likely to shed more workers than steel mills will hire. A 2020 study by economists at Harvard and the University of California, Davis found that tariffs on steel and aluminum had likely resulted in seventy-five thousand fewer manufacturing jobs in steel-using industries while creating just one thousand jobs in steel production.” (13)


Additionally, it’s been found that tariffs shirking the economy; “the Tax Foundation, which is generally skeptical of tariffs, estimates that tariffs will slash U.S. gross domestic product (GDP) by 0.21 percent and reduce employment by 166,000 jobs.


Moreover, we still encounter the specter of retaliatory tariffs. China responded by imposing tariffs in kind and Canada and the EU retaliated against tariffs on steel and aluminum. 


And yet, both Democrats and Republicans continue to insist that tariffs create new jobs, increase economic growth, and decrease trade deficits, are good for American workers and so on. 


While strides have been made under the current administration in shoring up the overall economic health of the country, what’s gone overlooked is the impact on poorer households, certainly from a constellation of factors but not least of which would be the very mechanism as noted where the poorest wind up paying for tariff generated protectionism. The Peterson Institute for International Economics in a post from ten years ago was already tracking how tariffs hit poor Americans the hardest.


“Because tariffs are imposed by Congress, they protect politically influential firms at the expense of household consumers and industrial purchasers….US tariffs broadly operate as a regressive tax. They put much more pressure on lower income households than on higher income households.” I’ll add the full post as an appendix, but key takeaways are that — and remember this is from 2014 — tobacco, food and clothing tariffs have greater impacts on the poorest households. “Tariffs, moreover, can have a ‘supply side’ impact on inequality, beyond these measures of costs to consumers. Skilled workers or capital owners could get more income because of trade protection, producing greater inequality. Or unskilled workers could get more income, leading to less inequality.”(14) 


Ten years later, I think we’ve seen which of these outcomes has resulted.


The USDA Economic Research Service published a report on the impact retaliatory tariffs had on U.S. agricultural exports. The retaliation was in response to those tariffs on aluminum and steel imposed on China, Canada, and the EU. Annual losses from the retaliatory tariffs were $13.2 billion. The Midwestern States took the biggest hits with losses largest among producers of soybeans, sorghum, and pork.(15)


While Erica York at Tax Foundation admits that the debate over just what the effects of Trump 2.0’s tariffs might mean, neither option she points to is cheery. “Tariffs could have an inflationary impact or cause an economic downturn in the shortrun.” She concludes that “no matter whether the short-term adjustment involves inflation or temporarily heightened unemployment, the long-run adjustment to tariffs involves lower incomes and production.”(16) And again, all of this translates into real societal stress and misery. 


To delve deeper into this, the Peterson Institute’s policy brief “24-1 Why Trump’s Tariff Proposals Would Harm Working Americans” is a must read. Consider this, “The costs from Trump’s proposed new tariffs will be nearly five times those caused by the Trump tariff shocks through late 2019, generating additional costs to consumers from this channel alone of nearly 2 percent of GDP.”(17) In harsher daylight terms, “It has become fashionable to argue that tariffs, though clearly second best and distortionary, are nonetheless necessary in a country without a strong social safety net or adequate place-based policies to cushion communities from the adverse effects of trade shocks.” (18) The problem here is that this is precisely the cycle the Trump administration will set into play. Eroding, if not eradicating completely, what’s left of America’s social safety net, plays as additional justification for levying tariffs; but the costs will escalate, adding $5 trillion to the deficit over 10 years and it will be the poorest of the population who will pay since lower-income households consume a much higher share of their income while richer households can afford to save more.


The report looks at the effects tariffs will have on our allies, as well as countries like China (which has already begun taking steps to minimize any effects Trump’s tariffs may have) and notes that if levied against allies, will simply alienate them and isolate us. The report warns “At a time when international conflicts are manifold and International collective action problems are substantial, the United States cannot afford to alienate its partners and allies.”(18) But let’s be up front here: Trump and his gang don’t care. This fractious bunch of ninnies are going to wreck the economy, countless families, and damage our alliances without a care in the world. And they will blame, you can rest assured, any misery, backlash, or collapse on anything and everyone but themselves.


I’ve said that I’d offer where I can, ideas about what to do or some thoughts about what might mitigate full deployment of different aspects of the Trump Doctrine. Here it’s going to come down to Congress likely bogging down in to some degree in getting tariffs passed in full. It’s possible that, as narrow as their majority is, the Democrats may be able to sway enough Republicans to stymie full implementation. This may be moot, however, if Trump is willing to simply, as Project 2025 has it, “force the bureaucrats to bend”. 


Some companies are stocking up on goods and ramping up manufacturing ahead of Trump’s occupation, but I don’t see how that’s going to help too much. 


I don’t know that there’s much that we as individuals can do, except prepare for price hikes that will reflect a loss of $1700 per household annually, if not more. 


Next up, The War on Women.



Appendix 1


Tariffs Hit Poor Americans the Hardest - from 2014; An example of the principles and effects of tariffs found throughout this post and the research materials in Sources.


Tariffs Hit Poor Americans Hardest

Tyler Moran (PIIE)

DATE

July 31, 2014 8:45 AM

BODY

Raising or maintaining tariffs on imports is called protectionism for a reason. The goal is to protect domestic industry and jobs from lower priced foreign goods. But often forgotten is the impact of the US tariff structure on the wallets of American consumers when they visit shopping malls and have to pay a higher price for the goods they purchase. The table below tells the story by income category: Poor households get hit hardest.


Chart: tariffs and their effects on different incomes



Sources: Bureau of Labor Statistics, Consumer Expenditure Survey; United Nations Conference on Trade and Development, TRAINS.

Because tariffs are imposed by Congress, they protect politically influential firms at the expense of household consumers and industrial purchasers. As the table illustrates, US tariffs broadly operate as a regressive tax. They put much more pressure on lower income households than on higher income households.


The impact of tariffs on the pocketbook can be calculated using consumption data from the US Bureau of Labor Statistics (BLS) and applied tariff rate data from UN Trade Analysis and Information System (TRAINS), which are matched with the spending habits of various income groups. For each income bracket, some 21 product groups that are subject to a nonzero tariff (ranging from fruits and vegetables to furniture) are assigned tariff impact scores equal to the share of consumption spent on those products times the tariff rate on imported goods of the same type. For example, imported poultry products are subject to an average tariff of 10 percent. Poultry makes up about 0.4 percent of consumption for households making less than $5,000, which serves as the “weight” for the tariff on poultry products. The results are then averaged, giving an average tariff faced by consumers for each income bracket (on products that are associated with a nonzero tariff). This calculation assumes that a tariff of 10 percent raises the price of both imports and competing domestic goods by 10 percent. That does not always happen. Some domestic producers offer lower prices for goods competing with imports. But even if the impact of tariffs on consumers is imprecise, the figures show that the relative impact of the US tariff schedule affects different household income groups in different ways. The impact disproportionately falls on lower income households, as any regressive tax, such as a sales tax, would.


Individual product scores are combined as a weighted average, giving the results shown in the table above. The biggest contributor to the regressive impact of the US tariff schedule on lower income households is tobacco, which faces an extremely high tariff (roughly 90 percent). Food and clothing tariffs also have a greater impact on poor households.


Our table does not claim to give a complete picture of US protection against imported products. It doesn’t reflect barriers on services (such as health and education), and it doesn’t reflect nontariff barriers on goods (such as the US import quota on cheese). Tariffs, moreover, can have a “supply side” impact on inequality, beyond these measures of costs to consumers. Skilled workers or capital owners could get more income because of trade protection, producing greater inequality. Or unskilled workers could get more income, leading to less inequality. The impacts on the “supply side” of production are unclear. But the table clearly portrays the regressive pocketbook dimension of the US tariff structure.


Appendix 2


Cart: major tariffs imposed by Trump and Biden





Notes


  1. Chatzky, Sirirpurapu, and Berman.

  2. Engen. "Markets and Prices”

  3. Chatzky, Sirapurapu, and Berman.

  4. Wikipedia. 

  5. ibid.

  6. Ibid.

  7. Chatzky, Sirirpurapu, and Berman.

  8. Lincicome.

  9. Chatzky, Sirirpurapu, and Berman.

  10. Ibid.

  11. Ibid.

  12. Furceri, Hannan, Ostry, and Rose.

  13. Ibid.

  14. Moran.

  15. Morgan.

  16. York.

  17. Clausing and Lovely.

  18. Ibid.


Sources


Baldwin, Richard. Unilateral Tariff Liberalisation. National Bureau of Economic Research. December 2010. https://www.nber.org/papers/w16600.


Blanchard, Olivier. How Will Trumponomics work out? Peterson Institute for International Economics. November 13, 2024. https://www.piie.com/blogs/realtime-economics/2024/how-will-trumponomics-work-out.


Chatzky, Andrew; Siripurapu, Anshu; Berman, Noah. What are Tariffs? Council on Foreign Relations. June 21, 2024, retrieved November 16, 2024. https://www.cfr.org/backgrounder/what-are-tariffs.


Clausing, Kimberly A., and Lovely, Mary E. 24-1 Why Trump’s Tariff Proposals Would Harm Working Americans. Tax Foundation. https://www.piie.com/blogs/realtime-economics/2024/how-will-trumponomics-work-out.


Chu, Ben. Would Donald Trump’s tariffs hurt US consumers? BBC. November 7, 2024. https://www.bbc.com/news/articles/c20myx1erl6o.


Engen, Darel Tai. The Economy of Ancient Greece. Economic History Association. 2023. https://eh.net/encyclopeida/the-economy-of-ancient-greece/.


Frew, Holly. Are tariffs good or bad for the economy? Research says they can be bad for the supply chain. Georgia State University Robinson College of Business. October 15, https://news.gsu.edu/2024/10/15/are-tariffs-good-or-bad-for-the-economy/.


Furceri, Davide; Hannan, Swarnali A.; Ostry, Jonathan D.; Rose, Andrew K. Macroeconomic Consequences of Tariffs. National Bureau of Economic Research Working Paper 25402. Cambridge MA. December 2018. http://www.nber.org/papers/w25402.


__________________________________________________________________. Are tariffs bad for Growth? Yes, say five decades of data from 150 countries. NIH National Library of Medicine. April 12, 2020. https://pmc.ncbi.nlm.nih.gov/articles/PMC7255316/


Hawkins, Amy and Davidson, Helen. Trump tariffs are coming, but some Chinese companies already know how to avoid them. The Guardian. November 19, 2024. https://www.theguardian.com/world/2024/nov/20/donald-trump-tariffs-plan-china-imports-companies-impact-ntwnfb


Lester, Simon and Zhu, Huan. Closing Pandora’s Box: The Growing Abuse of the National Security Rationale for Restricting Trade. Cato Institute. June 25, 2019. https://www.cato.org/policy-analysis/closing-pandoras-box-growing-abuse-national-security-rationale-restricting-trade.


Lincicome, Scott. ‘Dumping’ Doesn’t Mean What You Think It Means. Cato Institute. Cato.org. February 16, 2022. https://www.cato.org/commentary/dumping-doesnt-mean-what-you-think-it-means


Moran, Tyler. Tariffs Hit Poor Americans the Hardest. Peterson Institute for International Economics. July 31, 2014. https://www.piie.com/blogs/trade-and-investment-policy-watch/tariffs-hit-poor-americans-hardest.


Morgan, Stephen. Retaliatory Tariffs Reduced U.S. States’ Exports of Agricultural Commodities. USDA Economic Research Service. March 7, 2022. https://www.ers.usda.gov/amber-waves/2022/march/retaliatory-tariffs-reduced-u-s-states-exports-of-agricultural-commodities/.


National Retail Federation. Trump Tariff Proposals Could Cost Americans $78 billion in Annual Spending Power, According to NRF Study. November 4, 2024. https://nrf.com/media-center/press-releases/trump-tariff-proposals-could-cost-americans-78-billion-annual-spending


Nishant, Niekt; Tiwary, Shivansh; Saini, Manya. Walmart, other US companies raise concerns over proposed tariffs. Reuters. November 19, 2024. https://www.reuters.com/markets/us/walmart-other-us-companies-raise-concerns-over-proposed-trump-tariffs-2024-11-19/


Wikipedia. Tariff. Retrieved November 16, 2024. https://en.wikipedia.org/wiki/Tariff#History.


York, Erica. How Will Trump’s Universal and China Tariffs Impact the Economy? Tax Foundation. November 8, 2024. https://taxfoundation.org/blog/trump-tariffs-impact-economy/.

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