For four days last week, Donald Trump was busy in Europe. Between a state visit to Britain, a memorial marking the 75th anniversary of D-Day, and a jaunt at a luxury golf course in Ireland, Trump, it seemed, was consumed by his trip. But in between all the fanfare, he managed to make some noise back home: he threatened to levy tariffs against Mexico to force our southern neighbor’s hand on what he considers an out-of-control border problem. He also casually threatened to raise already-existing tariffs on China by $300 billion while talking to reporters.
The move enraged the Chinese government and shocked Washington, but perhaps it shouldn’t have. After all, Trump’s love of tariffs as a political and economic tool is well-documented. Only a few months ago, Trump proudly called himself a Tariff Man in a tweet where he also promised to “MAKE AMERICA RICH AGAIN.”
As far back as his 2016 presidential campaign, Trump told rally attendees that he would use tariffs to boost the American economy. According to Reuters, in June 2016, Trump “threatened to apply tariffs under sections 201 and 301 of U.S. trade legislation” and said that “China’s entrance into the World Trade Organization enabled the ‘greatest jobs theft in history.'”
So it’s not a surprise that tariffs are what ABC News describes as “one of Trump’s favorite policy tools.” Still, the president’s reliance on this blunt policy tool has many on both sides of the aisle worried about both the short- and long-term impacts on the American economy. It has also raised questions about what the hell tariffs are, how they work, and who is really paying for Trump’s tariffs.
We break it down.
What is a tariff?
Put simply: a tariff is a tax put on imported goods. In a vacuum, a tariff would ostensibly create revenue and protect a country’s industries from being undersold by outside, competing industries. For example, country A has a booming steel industry, and citizens from country A are happy to buy these products. But thanks to a trade agreement, country B is now allowed to sell their steel in country A. Country B’s steel is 20 percent cheaper, so consumers obviously start buying B steel. This starts to hurt country A’s steel industry, so country A enacts a 25 percent tariff, making country B’s steel 5 percent more expensive for consumers than country A’s steel, effectively protecting country A’s steel industry.
But things are never as simple as they seem. According to Investopedia, “By making foreign-produced goods more expensive, tariffs can make domestically produced alternatives seem more attractive.”
They can also be harmful to a country’s economy for several reasons:
- Domestic industries become less efficient due to lack of competition.
- Lack of competition can lead to steeper prices for consumers.
- If a country uses a tariff to pressure a trade partner politically (say, country A puts an import tax on country B’s corn supply, putting economic pressure on country B until they agree to support country A’s attempt to internationally ban making fun of mustaches), that trade partner could hit them with retaliatory taxes. Those retaliatory taxes could go back and forth, creating a trade war.
These trade wars, in particular, are harmful. Despite how high-level and removed from the every-day it sounds, the cost of higher import taxes is often passed onto the consumer, meaning many foreign-made goods that people rely on (say, a contractor who imports steel in order to be able to conduct his business or an individual who buys imported tomatoes because they’re cheap enough to afford) suddenly become out-of-reach expenses.
There’s also a long-established history of tariffs being wielded as tools for isolationism. The most famous example in the U.S. is, of course, the Smoot-Hawley Tariff Act of 1930, which used extremely high import taxes to prevent outside goods from coming into the country. The act imposed 40-48 percent taxes on approximately 900 goods — and it’s often credited as one of the chief drivers behind the worsening of the Great Depression and World War Two.
Tariffs fell out of vogue after World War Two ended; the post-WWII world created numerous global trade agreements and, of course, the World Trade Organization, an international organization which regulates global trade rules among member nations. We have trade agreements like the 1994 North American Free Trade Agreement, an accord between the U.S., Canada, and Mexico, which eliminated most tariffs between the three countries and changed American manufacturing permanently.