President-elect Donald Trump has made his thoughts on tariffs very clear, saying, “‘Tariff’ is the most beautiful word in the dictionary.” “I think it’s more beautiful than ‘love’. …I love tariffs…it’s music to the ears!
And what exactly is a tariff? It’s a tax. “In American history, we’ve basically only talked about import tariffs, taxes on imported goods coming into the United States,” said Dartmouth economics professor Doug Irwin.
Irwin said there are all sorts of reasons why governments introduce tariffs: “Sometimes it’s to reduce trade deficits, sometimes it’s to bring back jobs, sometimes it’s to stop unfair trade practices in other countries. Sometimes it’s to punish. Sometimes it’s to raise revenue to reduce the trade deficit.”Income tax. ”
At its most basic, tariffs work like this:
Suppose you want to import a product from China. The price is $50. But before you buy, our government adds $25 to the price. That is the price list. Final price is $75. China gets $50. The additional $25 ultimately goes to the U.S. Treasury.
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But who pays these duties?
According to Trump, it’s another country. “Trillions of dollars are being funneled into the U.S. Treasury,” he says, explaining what will happen. “China paid hundreds of billions of dollars during my term.”
But as Irwin points out, tariffs don’t work that way.
“Economists would say it would be very misleading to say that’s happening,” he said. “Of course, it’s American consumers who are paying these prices, not China itself. China is not writing checks to the U.S. government.”
Rather, it is a transfer of money from consumers to the federal government. It’s tax.
Tariffs have been a part of international trade since our nation’s founding. The first one was imposed by George Washington! And what we have learned from history is that they often have unintended consequences.
Tariffs are being imposed on sugar, and the price of sugar has doubled. This saved sugar cane farmers in Louisiana and Florida, but it also sent 34% of America’s chocolate and candy manufacturing industry (and jobs) out of the country.
Then, in 2018, President Trump imposed a 25% tariff on imported steel. Although our country’s steel manufacturers prospered, companies that made things from steel (Ford, GM, Caterpillar, etc.) suffered greatly. Just ask Jim Hackett, Ford’s then-CEO. “Metal tariffs have taken about $1 billion in profits from our company,” he told Bloomberg in 2018. “The longer this continues, the more damage will be caused.”
Tariffs on certain countries can be counterproductive. “Tariffs on China have led to more imports from Vietnam and more imports from Malaysia,” Irwin said. I’m just there,” he said. In a sense, from China to Vietnam. ”
P.S.: Tariffs don’t just raise the price of imported goods. It may also affect the prices of domestic substitutes.
So, if there’s a tariff on imported steel, and I’m an American steel manufacturer, can I opportunistically say, “Hey, I can raise the price now!”? absolutely! “Consumers no longer have a choice. They can buy very expensive steel, or they can buy you,” Irwin said.
Finally, there is the issue of retaliation. “The European Union and China were very angry with us when we imposed steel tariffs,” Irwin said. “So what did they do? They raised tariffs on American agricultural products. So American farmers, who had nothing to do with steel per se, suddenly had limited ability to sell overseas. I realized that
Even Ronald Reagan might have said so. In fact, he did! In 1987, President Reagan said, “High tariffs inevitably trigger foreign retaliation and fierce trade wars.The result is higher and higher tariffs, higher and higher trade barriers, and lower and lower competition.” ” he said.
So, what kind of tariffs is President Trump proposing specifically?During his election campaign, Trump promised that as president he would “introduce a universal basic tariff system in stages.” Initially, he outlined tariffs on every product in every category in every country around the world. “We’re going to charge them 10 to 20 percent,” he said.
Now, every recent president supports some kind of tariff. For example, the Biden administration maintained some tariffs from the Trump administration’s first term and imposed its own 100% tariff on electric vehicles made in China. However, these tariffs have always targeted specific categories of products. “A flat tariff? It’s not targeted at any particular product or product, and it’s not targeted at any particular country,” Irwin said. “It just says, ‘All imports, all sources, are subject to this tax.'” That’s a completely different type of tariff. ”
And aren’t we going to notice that the prices of everything are going up? “We definitely will notice,” Irwin said.
Recently, President Trump has proposed double-digit tariffs on everything imported from Mexico, Canada, and China.. They will raise the prices we pay for fruit, wood, electronics, oil, pharmaceuticals, metals, beef, and more.
Studies have estimated that these tariffs will result in the loss of 1% of all U.S. jobs (according to the Peterson Institute for International Economics). Increase the average car price by $3,000 (according to Wolfe Research). And it costs every American household at least $1,000 a year (according to the Yale Institute for Budget Studies).
But Trump transition leader Howard Lutnick predicts that Trump will not tax imports that don’t have American-made alternatives. Back in September, Lutnick told CNBC, “Tariffs are a great tool that the president can use. It’s a great tool. But the president understands, don’t put tariffs on things that we don’t make. If we… If I don’t make it, then you want to buy it, but I don’t want to raise the price.”
But perhaps President Trump has no intention of seriously imposing tariffs? Perhaps he is playing a strategic game – tariffs as a negotiating tactic?
“Tariffs can be used as a threat or a bargaining chip,” Irwin said. “And if you’re really trustworthy, sometimes the threat of tariffs is enough to get the other country to change its policies in the way you want, even if you don’t end up actually imposing them. ”
After all, when governments want to achieve some economic or geopolitical goal, they use all kinds of different tools: subsidies, tax breaks or penalties, trade agreements, regulations, certifications, investment incentives, diversification, etc. You can.
Tariffs are also a powerful tool, according to Doug Irwin. They are rarely the best. “Economists say that because tariffs usually have many unintended consequences and can cause backlash that other countries retaliate against, they are not really good policy for achieving the goals that we all as Americans want to achieve,” he said. “We have come to the conclusion that it is not a means.” .
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Story produced by Dustin Stevens. Editor: Ed Givenish.