Since January 20, both consumers and producers have anxiously awaited the implementation of tariffs (taxes on imports) promised by the new Trump administration. An original declaration of raised tariffs on Canada and Mexico was quickly shelved after U.S. President Trump spoke with his Canadian and Mexican counterparts. Trump stated that he would delay the implementation of the tariffs due to diplomatic concessions. Despite delaying the across-the-board tariffs on goods from Canada and Mexico, Trump did enact higher tariffs on specific imports (aluminum and steel) and tariffs of 10 percent on all goods from China.
This week, President Trump added additional goods to the list of those facing higher tariffs, stating that those tariffs would be around 25 percent. New goods facing the 25 percent tariffs, which will come into effect in early April, include vehicles, semiconductors, and pharmaceuticals – three industries where domestic companies have faced stiff foreign competition. Roughly half of new vehicles purchased by Americans are imported brands, typically from Japan (Toyota and Honda), South Korea (Kia and Hyundai), or Germany (Volkswagen and Audi). Trump and his supporters have praised the tariffs as causing international companies to begin moving manufacturing stateside, providing jobs for Americans.
High Tariffs Have a Mixed History
In the modern era, tariffs are highly controversial. After World War II, most nations abandoned high tariffs as a revenue-generating tool and pursued the concept of free trade. Between the late 1940s and the 1990s, the free trade movement was popular, and institutions such as the World Trade Organization (WTO), the European Union (EU), and the North American Free Trade Agreement (NAFTA) were created. Protectionist policies like tariffs and quotas were significantly reduced, allowing consumers easy access to lower-cost imports.
However, free trade harmed some domestic industries. Famously, American automakers struggled in the late 1970s and early 1980s to compete with lower-cost Japanese cars, forcing government intervention. Although tariffs and other trade restrictions are seen as helping protect domestic companies, critics argue that they raise prices and result in retaliatory tariffs that hurt American exporters. For example, high tariffs on steel and aluminum may help the U.S. steel industry, but lead to retaliatory tariffs that hurt the high-exporting U.S. computer industry.
Tariff Revenue Can Help Balance The Budget
One goal of raising tariffs may be to help cushion federal government revenue in hopes of balancing the budget in the face of proposed tax cuts. President Trump is pushing for massive tax cuts, even exceeding his 2017 tax cuts. The $4.5 trillion in tax cuts is a tremendous boon to taxpayers, both individuals and firms, but reduces the ability of the federal government to provide crucial services if revenues don’t improve elsewhere. The government can create bigger revenue streams elsewhere by selling U.S. Treasury bonds or implementing tariffs.
Critics argue that the proposed tariffs will fall far short of paying for Trump’s 2025 tax cut goals, forcing more federal borrowing that will raise interest rates. Tariffs can also be a net positive, though – only time will tell.
