TRADE & TARIFFS
short 1 sentence summary
An Introduction to Tariffs
A tariff is a tax placed on goods that cross national borders. The most common type is an import tariff, which is a tax on goods brought into a country. Less common are export tariffs, which tax goods leaving a country, though the U.S. Constitution forbids them. Tariffs are usually imposed for two main reasons: protection and revenue. A protective tariff raises the price of imported goods to make local products more competitive, helping domestic industries. A revenue tariff, on the other hand, is meant to raise money for the government. Although tariffs used to be a major source of government funding, their role in revenue collection has declined over time.
Tariffs have existed for centuries and have been used in the U.S. since 1789. In the early days of the U.S., tariffs made up a significant portion of government income over 41% in 1900. However, by 2013, tariffs only contributed about 2% of government revenue, as other forms of taxation, like income and sales taxes, became more important. Even though tariffs are no longer a key revenue source for wealthier countries, they are still important for many developing nations. In recent years, tariffs have been used more frequently for protectionist purposes, such as shielding certain industries from foreign competition or addressing trade imbalances.
In the U.S., Congress has the power to set tariffs, but in certain situations, the President can impose them, especially in cases involving national security or economic emergencies. When a tariff is applied, the importer or the company bringing goods into the country must pay the tax to the United States. However, the true cost of tariffs is often passed down to consumers through higher prices. The effects of a tariff depend on whether the country imposing it is a large open economy or a small open economy. Large economies, like the U.S., can influence global prices, meaning foreign producers may lower prices to stay competitive. In contrast, small economies cannot influence world prices, so tariffs simply make goods more expensive for consumers.
While tariffs can benefit domestic industries by reducing competition, they often come at a cost. Consumers pay more for goods, businesses may face higher costs for materials, and overall trade volume decreases. Additionally, tariffs can lead to retaliation, where other countries impose their own tariffs in response. This happened in 2018 when the U.S. raised tariffs, and countries like China and the European Union responded with their own, affecting billions of dollars in trade. In the end, while tariffs can provide short-term benefits to certain industries, they also create economic challenges that can impact both businesses and consumers.
The study of tariffs in economics has long been shaped by the debate between free trade and protectionism. Adam Smith (The Wealth of Nations, 1776) and David Ricardo (On the Principles of Political Economy and Taxation, 1817) laid the foundation for free trade arguments, showing that tariffs distort markets and reduce overall economic welfare. However, thinkers like Friedrich List (The National System of Political Economy, 1841) and Alexander Hamilton (Report on Manufactures, 1791) defended tariffs as necessary for industrial development, shaping protectionist policies in the 19th and early 20th centuries.
By the 20th century, economists formalized trade theory and tariff effects. Jacob Viner (Studies in the Theory of International Trade, 1937) provided a comprehensive historical analysis, while Paul Samuelson (1948) and Harry G. Johnson (1953) explored how tariffs influence wages and economic efficiency. In response to growing globalization, Jagdish Bhagwati (Protectionism, 1988) strongly critiqued tariffs as inefficient. More recently, Douglas A. Irwin (Clashing over Commerce, 2017) traced the history of U.S. trade policy, while Kyle Bagwell and Robert Staiger (The Economics of the World Trading System, 2002) analyzed tariffs in modern trade agreements. These works continue to shape contemporary debates on trade policy and economic growth.
Tariffs Today
Almost immediately after taking office, President Trump vowed to place tariffs on the country's biggest trading partners: 25% on Canada, 25% on Mexico, and 10% on China. The tariffs on Canada and Mexico, exempted oil and gas. The stated goal of the tariffs on Canada and Mexico was to curtail the flow of fentanyl. Though it should be noted that Canada provides less than 1% of all fentanyl in the States, making the exact reason for the levied tariffs unclear. Almost immediately, Mexico and Canada vowed to enact retaliatory tariffs against the United States with the economic impact in the hundreds of billions. Soon after, on February 3rd, it was announced that the tariffs on Mexico and Canada would be paused for a further month as negotiations continued.
The 10% tariffs on all Chinese products by the Trump administration were enacted and are currently in effect. The country announced a 15% tax on US imports of coal and liquefied natural gas products. Additionally, there is a 10% tariff on American crude oil, agricultural machinery, and large-engine cars.
Most recently, the President announced a 25% tariff on any and all steel and aluminum imports with no exceptions.
Tariffs & National Security
There are arguments that tariffs can be used for national security purposes. In the Wealth of Nations, Smith writes, “If any particular manufacture was necessary, indeed, for the defense of society, it might not always be prudent to depend upon our neighbors for the supply; and if such manufacture could not otherwise be supported at home, it might not be unreasonable that all the other branches of industry should be taxed in order to support it.” This reinforces the idea that tariffs’ primary goal may not be economic efficiency - it may in fact be national security instead.