What are the impacts of tariffs?

I was introduced to the concept of “tariffs” over half a century ago when I took my first undergraduate economics class. While I remembered the definition for the next test, to be honest, I didn’t find tariffs all that interesting or important.

Who would have thought that 55 years later tariffs would be one of the top topics of discussion? I’ve answered several media inquiries about them.  I’ve talked about tariffs in my various public presentations, and attendees listen.  Even people at the gym have asked me what I think about tariffs.  Usually something only economists talk about now seems to be the “talk of the town.”

First, what are tariffs?  They are a fee – some call them a tax – the federal government charges on a product or service imported from another country. The domestic company importing the foreign product or service is responsible for paying the tariff.

Why are tariffs used? There are numerous potential answers. One is to raise revenue for the federal government.  In fact, for the first 150 years of our country, tariffs were the major source of revenue for the federal government.

Using tariffs can help shield domestic producers from foreign competition, and thereby encourage domestic companies to expand. Our first Treasury Secretary, Alexander Hamilton, promoted tariffs to build up US industry. A modern version of this goal is using tariffs to make imports more expensive so as to encourage “re-shoring” of US firms that moved to foreign countries.

A more modern reason for applying tariffs is to express displeasure - some call them “punish” - a foreign country, for actions the importing country doesn’t like. For example, tariffs have been used by the US against China to impose a cost on them for allegedly subsidizing companies that sell products to the US, thereby making foreign trade unfair. Also, recently President-Elect Trump has threatened tariffs on Canada and Mexico if the countries don’t comply with his request to stem immigration to the US.

Last is the notion of fairness. Some argue that since most countries use tariffs, the US should also.  Interestingly, among the countries with tariffs, tariffs used by the US are some of the lowest.

My profession – economists – has long argued against tariffs. Their point is simple. If a foreign country can make and sell a product to us at a lower price than required for that product to be made in the US, then why would we refuse that trade?  Buying a foreign made product at a lower price would leave consumers with more money to spend on other things, many of which would be made in our country. 

While, as a professional economist, I understand this logic, I also understand some counterpoints. Many people worry that in a world of free trade, the good-paying jobs may be taken by foreign countries, leaving mostly lower-paying jobs for US workers. There’s also a viewpoint stating our country should be self-sufficient for national security purposes in producing the basics of life. 

There are other important questions about tariffs. One is who ultimately pays the tariff?   Although initially the payment is made by the company importing the product, the issue is whether that company passes that cost on to other entities. Indeed, research shows importers do attempt to make others pay at least some of the tariff. One is the ultimate consumer of the product who faces a higher retail price to help compensate for the importer’s tariff payment.  Another is the importer’s workers or other workers along the supply chain who endure cost cutting measures to offset the tariff’s cost.

A key second question is whether tariffs result in making US manufacturing stronger and more competitive? The existing research suggests the answer is perhaps not. Recent analysis looked both at the “hey-day” of US tariffs in the late 19^th century and recently imposed tariffs. In both cases the result found domestic manufacturing did not prosper under the tariffs.  However, questions may be raised about the recent research because it examined a period that was still impacted by the pandemic.

Yet the research does raise a concern about how foreign countries react to new US tariffs. If, for example, foreign countries increase their tariffs and curtail buying US exported products and services, there can be significant damage to the US economy.  US exports account for over $3 trillion of revenue annually for US companies, equal to 10% of total economic activity.

There are some analysts who argue decision-makers are aware of the potential problems with tariffs, implying the threats to impose tariffs may be a bargaining chip in trade and other negotiations. For example, the agreement governing trade between the US, Mexico, and Canada is set to be reviewed in 2026. Some experts think the in-coming Trump Administration is using talk about new tariffs as a tactic to be used in negotiations.  Others have interpreted the tariff talk as leverage for making an agreement with Mexico and Canada over immigration.

Tariffs are a controversial economic tool that has supporters and opponents and pluses and minuses. Tariff talk has increased in recent months, and the talk will likely continue into next year. Watch for the details and attempt to read the nuances so you can decide where you stand on this long used and debated economic tactic.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.