New President Donald Trump has made his feelings on tariffs very clear: “The word ‘tariff’ is the greatest word in the dictionary,” he said. “I think it’s more beautiful than ‘love.’ …I love the prices! …Music to my ears!
And what exactly is a tariff? It’s a tax. According to Doug Irwin, an economics professor at Dartmouth, “In American history, we basically just talk about import tariffs, taxes on imported goods coming into the United States. »
Irwin says governments have all sorts of reasons for introducing tariffs: “Sometimes it’s about reducing the trade deficit. Sometimes it’s to bring back jobs. Sometimes it involves punishing other countries for their unfair trade practices. Sometimes it’s about increasing income so that we can reduce income taxes.
In its most basic form, a tariff works like this:
Suppose we import a product from China. The price is $50. But before you can buy it, our government adds $25 price. This is the price. Your the final price is $75. China receives its 50 dollars; the extra $25 ends up going to the U.S. Treasury.
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But who pay these prices?
According to Trump, it’s other countries. “Billions and billions of dollars are flowing into the US Treasury” is his description of what is happening. “China paid hundreds of billions of dollars during my tenure. »
But as Irwin points out, that is NOT how tariffs work!
“I think economists would say it’s very misleading to say that’s what’s happening,” he said. “Of course it’s the American consumers they are the ones paying them, not China itself. China does not send checks to the US government.”
Rather, it is a transfer of money from consumers to the federal government. A tax.
Customs tariffs have been part of international trade since the creation of our country; the first was imposed by George Washington! And what we have learned from history is that they often have unintended consequences.
We have a sugar tariff that has doubled the price of sugar. This helped our sugarcane farmers in Louisiana and Florida, but it also drove 34% of American chocolate and candy manufacturing (and jobs) out of the country.
Then there were Trump’s 25% tariffs on imported steel in 2018. Our steelmakers prospered, but companies that make steel products (like Ford, GM, and Caterpillar) suffered greatly. Just ask then-Ford CEO Jim Hackett, who told Bloomberg in 2018: “The metals tariffs cost us about a billion dollars in profits. If it lasts longer, there will be even more damage. »
Tariffs imposed on a particular country can backfire. Irwin said: “With the Chinese tariffs, we’re importing a lot more from Vietnam, we’re importing a lot more from Malaysia. If the goal of the tariffs was to bring jobs back to the country, we are just moving them from China to Vietnam, in a way.”
And PS: customs tariffs not only increase the prices of imported products; they can affect the price of domestic also substitutes.
So if there are tariffs on imported steel, and I’m an American steelmaker, I can opportunistically say, “Well, now I I can also increase my prices! Absolutely! says Irwin: “Consumers no longer have a choice. They can buy the steel very expensive, or they can buy it from you.
Finally, there is the problem of retaliation. “When we put the tariffs on steel, the European Union and China were very angry with us,” Irwin said. “And what did they do?” They increased tariffs on American agricultural products. And all of a sudden, American farmers, who had nothing to do with steel per se, found their foreign sales limited.”
Even Ronald Reagan could have told you that. In fact, he did! In 1987, Reagan said: “High tariffs inevitably lead to retaliation by foreign countries and the outbreak of fierce trade wars. The result is more and more tariffs, higher and higher trade barriers and less and less competition.
So what tariffs exactly did Trump propose? During his campaign, he promised that as president, he “gradually introduce a system of universal basic tariffs”. Originally it described rates across the board: each produced, in each category, of each countries of the world. “We’re going to charge them 10 to 20 percent,” he said.
Today, all recent presidents have favored certain tariffs. The Biden administration, for example, maintained some tariffs from Trump’s first term and imposed its own 100% tariffs on Chinese electric cars. But these customs duties have always targeted particular categories of products. “A generalized tariff? It’s not targeting any particular product or raw material, or any particular country,” Irwin said. “It’s just saying, ‘All imports, all sources, are hit by this tax.’ »It’s a very different type of fare.
And wouldn’t we then notice a rise in prices, All? “We would do certainly notice,” Irwin said.
More recently, Trump has proposed double-digit tariffs on everything imported from Mexico, Canada and China.. They would increase the price we pay for products like fruit, wood, electronics, oil, medicine, metal and beef.
Studies have calculated that these prices will cost 1% of all American jobs (according to the Peterson Institute for International Economics); increase the average price of cars by $3,000 (according to Wolfe Research); And costs every American household at least $1,000 per year (according to Yale Budget Lab).
But Trump transition chief Howard Lutnick predicts his boss won’t tax imported products for which there are no American-made alternatives. In September, Lutnick told CNBC: “Tariffs are a great tool for the president to use. It’s an incredible tool. But he understands: don’t tax products we don’t make. If we can’t make it and you want to buy it, I don’t want to raise the price.
But maybe Trump doesn’t really intend to impose such tariffs? Perhaps he is playing a strategic game – tariffs as a negotiating tactic?
“Tariffs can be used as a threat and as a bargaining chip,” Irwin said. “And sometimes, if you’re really credible, just the threat of a tariff is enough to get another country to change their policy in the way you want without you ultimately having to impose the tariff.”
Ultimately, when a government wants to achieve an economic or geopolitical objective, it can use all kinds of different tools: subsidies, tax breaks or penalties, trade agreements, regulations, certifications, investment incentives, diversification.
According to Doug Irwin, tariffs are also a powerful tool. They are rarely the best A. “What economists have concluded is that tariffs generally have many unintended consequences, can backfire when other countries retaliate against you, and are therefore not a very good policy instrument for achieving the goals that all of us Americans want to achieve,” he said. .
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Story produced by Dustin Stephens. Editor: Ed Givnish.
