Trump advocates huge new tariffs. How do they work?

WASHINGTON – Donald Trump has identified what he sees as a one-size-fits-all solution to America's problems: imposing huge new tariffs on foreign goods entering the United States.

The former president and current Republican candidate claims that tariffs – essentially import taxes – will create more factory jobs, reduce the federal deficit, lower food prices and allow the government to subsidize child care.

He even says that tariffs can promote world peace.

“Tariffs are the greatest thing ever invented,” Trump said in Flint, Michigan, this month.

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As president, Trump quickly imposed tariffs on imported solar panels, steel, aluminum and just about everything from China.

“Tariff man,” he called himself.

This time he has gone much further: He has proposed a 60% tariff on goods from China — and a tariff of up to 20% on everything else the United States imports.

This week he upped the ante even further. To punish equipment manufacturer John Deere for its plans to move some of its production to Mexico, Trump promised to impose a 200% tax on anything Deere tried to export to the United States.

And he threatened to impose 100 percent tariffs on goods made in Mexico, a move that would risk blowing up a trade deal that Trump's own administration had negotiated with Canada and Mexico.

Mainstream economists are generally skeptical of tariffs, viewing them as a mostly inefficient way for governments to raise money and promote prosperity. They are particularly concerned about Trump's latest proposed tariffs.

This week, a report from the Peterson Institute for International Economics concluded that Trump's main tariff proposals — assuming target countries retaliate with their own tariffs — will weaken the U.S. economy by more than a percentage point and inflation by 2 percentage points by 2026 would increase next year than it otherwise would have been.

Vice President Kamala Harris has dismissed Trump's tariff threats as frivolous. Her campaign cited a report that found Trump's 20% universal tariff would cost a typical family nearly $4,000 a year.

But the Biden-Harris administration itself has a penchant for tariffs. Trump's taxes on $360 billion worth of Chinese goods were retained. And it imposed a 100 percent tariff on Chinese electric vehicles.

In fact, in recent years the United States has gradually retreated from its post-World War II role of promoting global free trade and lower tariffs. The shift was in response to U.S. manufacturing job losses, widely blamed on the unrestricted tree trade and an increasingly aggressive China.

Tariffs are a tax on imports

They are typically calculated as a percentage of the price a buyer pays to a foreign seller. In the United States, tariffs are collected by Customs and Border Protection officials at 328 ports of entry across the country.

Tariff rates range from cars (2.5%) to golf shoes (6%). Tariffs may be lower for countries with which the United States has trade agreements. For example, under Trump's U.S.-Mexico-Canada trade agreement, most goods can travel duty-free between the United States, Mexico, and Canada.

There is a lot of misinformation about who actually pays tariffs

Trump insists the tariffs will be paid for by foreign countries. In fact, it is the importers – American companies – who pay the tariffs, and the money goes to the US Treasury. These companies, in turn, usually pass on their higher costs to their customers in the form of higher prices. For this reason, economists believe that the cost of tariffs will typically be borne by consumers.

Still, tariffs can hurt other countries by making their products more expensive and difficult to sell abroad. Yang Zhou, an economist at Fudan University in Shanghai, concluded in a study that Trump's tariffs on Chinese goods caused more than three times as much damage to the Chinese economy as to the U.S. economy

Tariffs primarily serve to protect domestic industries

By increasing import prices, tariffs can protect domestic manufacturers. They can also be used to punish foreign countries for unfair trade practices, such as subsidizing their exporters or selling products at unfairly low prices.

Before the federal income tax was implemented in 1913, tariffs were an important source of government revenue. From 1790 to 1860, tariffs accounted for 90% of federal revenue, according to Douglas Irwin, a Dartmouth College economist who has studied the history of trade policy.

As global trade grew after World War II, tariffs fell out of favor. The government needed much larger sources of revenue to finance its operations.

In the fiscal year that ended Sept. 30, the government is expected to collect $81.4 billion in tariffs and fees. That's a small thing next to the $2.5 trillion expected to come from the individual income tax and the $1.7 trillion from Social Security and Medicare taxes.

Nevertheless, Trump wants to introduce fiscal policies similar to those of the 19th century.

He has argued that tariffs on agricultural imports could lower food prices by helping American farmers. In fact, tariffs on imported foods would almost certainly drive up food prices by reducing choice for consumers and competition for American producers.

Tariffs can also be used to pressure other countries on issues that may or may not be related to trade. In 2019, for example, Trump used the threat of tariffs as leverage to persuade Mexico to crack down on waves of Central American migrants crossing Mexican territory on their way to the United States.

Trump even sees tariffs as a way to prevent wars.

“I can do it with one phone call,” he said at an August rally in North Carolina.

If another country tried to start a war, he said, he would issue a threat:

“We will charge you 100% rates. And suddenly the president, the prime minister, the dictator, or whoever is running the country says, “Sir, we are not going to war.” ”

Economists generally view tariffs as self-defeating

Tariffs increase costs for businesses and consumers who rely on imports. They are also likely to provoke retaliation.

The European Union, for example, fought back against Trump's tariffs on steel and aluminum by taxing U.S. products, from bourbon to Harley-Davidson motorcycles. Likewise, China responded to Trump's trade war by imposing tariffs on American goods, including soybeans and pork, in a calculated attempt to hurt its supporters in the agricultural country.

A study by economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard and the World Bank concluded that Trump's tariffs have failed to restore jobs in the American heartland. The study found that the tariffs “neither increased nor decreased employment in the U.S.,” where they were supposed to protect jobs.

For example, despite taxes on imported steel introduced by Trump in 2018, the number of jobs in US steel mills has barely changed: it remained at around 140,000. For comparison: Walmart alone employs 1.6 million people in the United States.

Worse, retaliatory taxes imposed by China and other countries on U.S. goods have had a “negative impact on employment,” particularly for farmers, the study said. These retaliatory tariffs were only partially offset by billions of dollars in government aid that Trump gave to farmers. The Trump tariffs also hurt companies that rely on targeted imports.

However, if Trump's trade war failed as a policy, it succeeded as a policy. The study found that support for Trump and Republican congressional candidates increased in the areas most exposed to import tariffs – the industrial Midwest and manufacturing-intensive Southern states such as North Carolina and Tennessee.