Incoming President Donald Trump has made his feelings about tariffs very clear: “The word ‘tariff’ is the most beautiful word in the dictionary,” he has said. “I think it’s more beautiful than ‘love.’ … I love tariffs! … Music to my ears!”
And what exactly is a tariff? It is a tax. According to Dartmouth economics professor Doug Irwin, “In U.S. history, we’re basically only talking about import tariffs, taxes on imported goods coming into the U.S.”
Irwin says governments have all kinds of reasons for introducing tariffs: “Sometimes it’s to reduce the trade deficit. Sometimes it’s to bring back jobs. Sometimes it’s to punish other countries for their unfair trade practices. Sometimes it’s to raise revenue so that we can cut income taxes.”
At its most fundamental, 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 to the price. That’s the tariff. Your final price is $75. China gets its $50; the extra $25 winds up going to the U.S. Treasury.
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But who pays these tariffs?
According to Trump, it’s the other countries. “Trillions and trillions of dollars pouring into the United States Treasury,” is his description of what happens. “China paid hundreds of billions of dollars during my term.”
But as Irwin points out, that’s NOT the way tariffs work!
“I think economists would say that’s very misleading to say that that’s what’s going on,” he said. “Of course, it’s the U.S. consumers that are paying those, not China itself. China’s not writing checks to the U.S. government.”
Rather, it is a transfer of money from consumers to the federal government. A tax.
Tariffs have been part of international trade since our country was founded; the first one was imposed by George Washington! And what we’ve learned from history is that they often have unintended consequences.
We have a tariff on sugar that has doubled the price of sugar. It has helped out our sugar cane farmers in Louisiana and Florida, but it’s also driven 34% of American chocolate and candy manufacturing (and jobs) out of the country.
Then, there was Trump’s 25% tariff on imported steel in 2018. Our steelmakers thrived, but companies that make things out of steel (like Ford, GM and Caterpillar) suffered dearly. Just ask Ford’s then-CEO Jim Hackett, who in 2018 told Bloomberg, “The metals tariffs took about a billion dollars of profit from us. If it goes on longer, there will be more damage.”
Tariffs against one particular country can backfire. Irwin said, “With the China tariffs, we’re importing a lot more from Vietnam, we’re importing a lot more from Malaysia. If the idea with the tariff was to bring jobs back home, instead we’re just shifting them from China to Vietnam, in some sense.”
And P.S.: Tariffs don’t just raise prices on the imported stuff; they can affect the price of domestic substitutes as well.
So, if there’s a tariff on imported steel, and I’m an American steelmaker, I can opportunistically say, “Well hey, now I can raise my prices, too!”? Absolutely! says Irwin: “Consumers don’t have the choice anymore. They can buy the really high-priced steel, or they can buy you.”
Finally, there’s the retaliation problem. “When we imposed the steel tariffs, the European Union and China got very upset with us,” Irwin said. “And what did they do? They raised tariffs on American farm goods. So, all of a sudden, American farmers, who had nothing to do with steel per se, found their sales limited overseas.”
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 triggering of fierce trade wars. The result is more and more tariffs, higher and higher trade barriers, and less and less competition.”
So, exactly what tariffs has Trump proposed? During his campaign, he promised as president he would “phase in a system of universal baseline tariffs.” Originally, he outlined tariffs across the board — every product, in every category, from every country in the world. “We’re going to charge them 10 to 20 percent,” he said.
Now, every recent president has favored some tariffs. The Biden administration, for example, maintained some of the tariffs from Trump’s first term, and imposed its own 100% tariff on Chinese electric cars. But these tariffs have always targeted particular categories of products. “An across-the-board tariff? That’s not targeting a particular commodity or product, that’s not targeting a particular country,” said Irwin. “It’s just saying, ‘All imports, all sources get hit with this tax.’ That’s a very different type of tariff.”
And wouldn’t we then notice prices going up, on everything? “We would definitely notice,” Irwin said.
More recently, Trump has proposed double-digit tariffs on everything imported from Mexico, Canada and China. They would raise the price we pay for things like fruit, lumber, electronics, oil, medicine, metal and beef.
Studies have calculated that those tariffs will cost 1% of all American jobs (according to the Peterson Institute for International Economics); raise average car prices by $3,000 (according to Wolfe Research); and cost every American household at least $1,000 a year (according to Yale Budget Lab).
But Trump’s transition leader Howard Lutnick predicts that his boss won’t tax imported goods for which there are no American-made alternatives. Back in September, Lutnick told CNBC, “Tariffs are an amazing tool by the president to use. They’re an amazing tool. But he understands, don’t tariff stuff we don’t make. If we don’t make it, and you want to buy it, I don’t want to put the price up.”
But maybe Trump has no intention of imposing the tariffs for real? Maybe he’s playing a strategic game — tariffs as negotiating tactics?
“Tariffs can be used as a threat and a bargaining chip,” said Irwin. “And sometimes, if you’re really credible, just making the threat of a tariff is enough to bring another country to change its policy in a way that you desire without your actually having to impose the tariff in the end.”
In the end, when a government wants to achieve some economic or geopolitical goal, 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 a powerful tool, too. They’re just rarely the best one. “What economists have concluded is that tariffs usually have a lot of unintended consequences, can lead to blowback where other countries retaliate against you, and so are not a really good policy instrument for achieving goals that we all Americans want to achieve,” he said.
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Story produced by Dustin Stephens. Editor: Ed Givnish.
