During his recent Presidential election campaign, Donald Trump repeatedly professed his love of tariffs. The depth of this love was revealed by Trump’s proposals to levy baseline tariffs of 10 per cent on all imports, with special treatment being reserved for China (60 per cent) and Mexico (100 per cent). Despite his preference for tax cuts, this is one tax which Trump appears to have no quibbles with.
A tariff is a tax levied on an imported good, at the point of entry to any given country, either as a percentage of its value (ad valorem duty), or as a fixed charge per unit of the good (specific duty). Tariffs are designed to either raise government tax revenues; to restrict imports and protect domestic producers from foreign competition by increasing the relative price of imported goods, thereby reducing trade deficits and correcting a negative balance of trade; or to leverage favourable reciprocal trade agreements with other countries and thus open overseas markets to exports. Tariffs are often used by economic nationalists, who blame imports for job losses, loss of a nation’s manufacturing base, and depletion of national wealth.
America has had a long-lasting love affair with tariffs, dating back to the Tariff Act of 1789, the year the federal government was established. The Act was indeed the first legislative measure to be passed by the new US Congress. At one time, import duties generated as much as 90 per cent of the government’s income. Tariffs also helped protect domestic infant industries in the newly established nation from foreign competitors. In due course, the Republican Party in the northern states became identified with high tariffs to protect manufacturing industries, while the Democratic Party in southern states with an agrarian economy came to be known as the party of low tariffs. Republicans subscribed to protectionism, while Democrats subscribed to free trade. Following the introduction of federal income tax in 1913, government tax revenues ceased to rely on import duties.
Protectionist policies were once again adopted in America during the Great Depression of the 1930s, under the mistaken belief that this would protect the agricultural sector. The Tariff Act, named for its Republican co-sponsors Reed Smoot, chairman of the Senate Finance Committee, and Willis Hawley, chairman of the House Ways and Mens Committee, was signed into law by President Herbert C. Hoover in June 1930. It mostly failed in its objectives, instead inviting retaliatory counter-tariffs from Canada, America’s largest trade partner, and other nations, and led to the formation of trading blocs that threatened American commercial interests. This was to be the last time that Congress revised tariff rates. In 1934, the Reciprocal Trades Agreement Act empowered the President to negotiate trade arrangements with other countries. Since then, additional laws have increased the powers of Presidents to impose import tariffs or quotas, such as the Trade Expansion Act 1962, the Trade Act 1974, and the International Emergency Economic Powers Act 1977.
In the aftermath of the Second World War, a new international economic order emerged, as trade barriers were removed by the mediation of international institutions, such as GATT (General Agreement on Trade and Tariffs) in 1947, which became the WTO (World Trade Organisation) in 1995, while free trade agreements led to the creation of trading blocs such as the EU and NAFTA. The US became the dominant player in global free trade, only to face the consequences of globalisation, as American manufacturing jobs were outsourced to other countries with lower production costs, thereby increasing corporate profits and maximising shareholder returns. The consequent growing trade deficit in the world’s largest market, with China, in particular, was accompanied by layoffs, factory closures, and the deindustrialisation of many regions of the nation.
Tariffs returned with Donald Trump. His first Presidential term saw the imposition of tariffs on aluminium and steel (Section 232 of Trade Expansion Act 1962), solar panels and washing machines (Section 201), and a range of consumer, intermediate, and capital goods (Section 301). This was part of a programme to reduce America’s trade deficit, in which some exporting nations managed to secure exemptions. The Biden administration retained most of Trump’s tariffs, even increasing tariffs on an additional $18 billion of Chinese goods in May 2024.
Tariffs may be backed by voters seeking the protection of American jobs in import-competing industries. But there are many pitfalls, as tariffs tend to reduce trade, invite retaliatory counter-tariffs, and lead to wasteful trade wars. The economic burden of tariffs is likely to be inflationary as retail costs are increased for consumers, who also face reduced choices. Tariffs can lower the profits of domestic importers as well as those of foreign exporters, and also lead to job losses and lowered output in export-oriented sectors, where some sectors gain at the expense of others. According to the Lerner Symmetry Theorem, a tax on imports is equivalent to a tax on exports. Buyers and sellers tend to adjust their prices in response to tariffs, making it difficult to identify the real losers. Furthermore, globalised complex manufacturing supply chains, which rely on critical imported inputs from various countries, can be readily interrupted, leading to a slump in output of finished goods. The consensus of economists seems to be that that the first-term Trump tariffs had a net negative effect on the American economy.
Tariffs are most often somewhat simplistic and unsophisticated state interventions in the economy that disrupt free trade, beget more tariffs, and foster bureaucratic red tape. The imposition of tariffs is not a zero-sum game as there are losers on both sides. President Trump’s latest round of tariffs will inevitably invite detailed scrutiny by informed observers. Many nations, including the UK-whose single largest trade partner happens to be the US, anxiously await the potential impact of any American tariffs, as and when they are imposed. Due to the complexities of global trade, it is far too early to be certain that this latest trade policy will deliver the desired results, or otherwise.
Ashis Banerjee