(Bloomberg) -- The US heavily taxed imports for much of its history before largely abandoning the policy, beginning in the 1930s, as government leaders embraced the idea of free trade. High tariffs made a comeback during the presidency of Donald Trump, who adopted them in an effort to revitalize American manufacturing and to counter what the US regards as China’s unfair trade practices. Trump’s successor Joe Biden kept the trend going.
Now, Trump says that if he’s elected president again on Nov. 5, he will dramatically increase taxes on imports and put them at the center of his economic policy. His pledge has reignited a debate over whether tariffs are a valuable tool for competing with economic rivals or a policy weapon with a checkered past that’s likely to backfire.
What is Trump proposing?
He’s proposed raising tariffs to 60% for goods imported from China and to 20% for those brought in from the rest of the world. The US currently imposes tariffs in those ranges and higher on select categories of goods, but to levy them at that level across the board would be a radical change. Currently, for imported industrial goods, which make up 94% of US merchandise imports by value, the country has a trade-weighted average tariff rate of 2%, according to the Office of the US Trade Representative. That figure can be calculated by dividing the total value of imports by the total tariff revenue. Half of industrial goods enter the US duty free. According to a Bloomberg Economics analysis released in October, Trump’s tariff proposals “would bring average US levies above 20%, a level not seen since the early 20th century.”
Could Trump raise tariffs unilaterally?
Yes, although in some cases it would be necessary to first have a finding by one of the federal agencies that report to the president. Through a number of statutes, Congress has empowered the US president to modify tariffs to address a variety of concerns. These include a threat to national security, a war or emergency, harms or potential harms to a US industry, and unfair trade practices by a foreign country. While companies might try to fight higher tariffs in court, because of past deference given to presidential powers, such challenges “would face a steep uphill climb,” according to an article posted by the Center for Strategic & International Studies and co-authored by Warren Maruyama, a former general counsel for the Office of the US Trade Representative.
How do tariffs work?
A tariff, also known as a duty or levy, is usually calculated as a percentage of the good’s value, but it can also be levied as a fixed amount on each item. Goods that cross borders are given numeric codes under a standardized nomenclature called the “international harmonized system.” Tariffs can be assigned to specific product codes such as the one for a truck chassis or to broad categories, such as electric vehicles. Customs agencies collect tariffs on behalf of governments.
Who pays tariffs?
Tariffs are actually paid by the importer, or an intermediary acting on the importer’s behalf, though the costs are typically passed on. Trump argues that ultimately exporters pay for tariffs. Studies have shown the burden is more diffuse. The foreign company that makes the product may decide to lower prices to appease the importer. Or it might spend significant sums to build a factory somewhere else to sidestep the tariff. Or an importer — Walmart and Target are among the biggest in the US — could raise the prices consumers pay at the checkout counter.
How have views on tariffs evolved in the US?
The first US tariffs — a 5% tax on all imports — were signed into law in 1789 by President George Washington. The purpose was mainly to raise revenue for a fledgling government and secondarily to protect America’s nascent manufacturing industry against foreign competition in order to diversify the US economy, which was heavily agricultural.
Until about 1900, tariffs accounted for more than half of US government receipts. As other kinds of taxes took their place, they became less essential. (Even with the increases in recent years, tariffs today account for a sliver of Uncle Sam’s income.) What’s more, tariffs came to be regarded as harmful.
The effects of the Smoot-Hawley Act of 1930 became the textbook case against tariffs. The law was initially intended to protect American farmers but was broadened as other industries lobbied for inclusion. It led to roughly a 20% increase in import duties on average, according to a paper by trade historian Douglas Irwin. Smoot-Hawley provoked retaliatory tariffs from foreign governments, resulting in a drop in global trade and a deepening of the Great Depression.
In 1934, President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, which set in motion a new pattern of tariff reductions premised on the belief that strengthened international trade would fuel the US economy. The act set the stage for the international General Agreement on Tariffs and Trade of 1947, a set of accords aimed at abolishing trade barriers between countries. In this era following World War II, support for free trade among Western countries was fed by the belief that trading partners would be less likely to wage war on one another.
GATT was the forerunner to the World Trade Organization, formed in 1995. Based in Geneva, the WTO has 166 members who account for 98% of world trade. While the WTO’s overall goal is to reduce barriers to trade, it has rules for imposing tariffs, for instance, when large amounts of products are “dumped” into markets or when goods are produced with the help of state subsidies.
How does China figure into all of this?
Through those years, the belief in free trade was backed by a bipartisan consensus in the US and by multinational corporations that wanted access to cheap and efficient supply chains overseas. But China’s ascension as a global economic power broke the consensus. Admitted to the WTO in 2001, China gained greater access to global markets even as its critics say it broke the letter and spirit of free-trade rules, for example by subsidizing its industries and compelling foreign companies operating in China to part with their know-how. A number of researchers have concluded that competition from China triggered a decline in US employment among manufacturers that faced a surge in imports.
The Trump administration imposed new tariffs on Chinese imports that were worth about $380 billion in 2018 and 2019. The Biden administration maintained those levies and raised more of them this year on goods worth an additional $18 billion. The new enthusiasm for tariffs has spread to the European Union. It voted in early October to impose duties as high as 45% on electric vehicles from China, which in turn has threatened to retaliate against European products.
On the 2024 campaign trail, Trump has argued that across-the-board import taxes would have benefits beyond defending domestic industries: They would flood the Treasury with billions in revenue, push companies that don’t produce goods in the US to do so, and enable the US to extract concessions from trade allies and rivals alike. Trump’s Democratic opponent in the election, Vice President Kamala Harris, has criticized his proposed tariff increases as a “national sales tax” that would hurt consumers. But she hasn’t articulated her own agenda on trade.
How have tariff hikes affected the US so far?
It can be difficult to sort through the economic effects of tariffs. They can stimulate employment by attracting investment as companies try to get around tariffs by moving factories to the taxing country. At the same time, they can provoke retaliatory tariffs that cost jobs in other parts of the economy.
In a well-regarded paper published by the National Bureau of Economic Research, authors David Autor, Anne Beck, David Dorn and Gordon Hanson concluded that the Trump tariffs of 2018-2019 failed to increase jobs in the protected industries while hurting jobs in sectors targeted by retaliatory tariffs, especially agriculture.
Economists are still untangling the inflationary effects of Trump’s initial tariffs from a much bigger shock to supply chains and economic activity that started not long after the US-China trade war began: the Covid-19 pandemic.
In February 2019, the Federal Reserve Bank of San Francisco estimated that the tariffs were adding 0.1 percentage point to consumer price inflation and 0.4 percentage point to a metric that measures the costs for businesses to invest. Erica York, senior economist at the nonpartisan Tax Foundation, estimates that the Trump-Biden tariffs increase the average annual household tax bill by $625.
In addition, York estimates that the hikes will eliminate 142,000 full-time jobs and over the long run will reduce long-run gross domestic product by 0.2% on average. Critics of Trump’s proposal to drastically increase tariffs worry that it would have the same kind of effects, at a much greater scale.
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