Tariffs Pose Taxing Problems

Both the former Trump and the current Biden administrations in the US have used tariffs to punish countries like China that they deem to be unfairly competing with the US. The practice is a hot issue in the US presidential race.

Tariffs are probably as old as international trade and can help to level the commercial playing field. However, as often happens, the case for wielding them is more complicated than the political arguments used to justify them.

In 2018 and 2019, President Trump imposed tariffs on thousands of products valued at approximately $380 billion, according to research from the Tax Foundation. The Biden administration kept most of the tariffs and imposed additional ones on Chinese goods.

Hiking the price of targeted imports with tariffs supposedly makes domestic producers of those products more price-competitive, thereby bolstering US manufacturing and creating jobs. Another pro argument is that since the offending country pays the charges, tariffs represent a free, and even lavish, source of revenue for the US government. 

In reality, US importers pay the cost of tariffs. Absorbing the cost of the “tax” penalizes them financially. If importers pass on all or some costs to companies that sell the imported goods, these sellers will increase their prices to consumers. In other words, everyone pays. Importers and sellers pay more; foreign manufacturers see a reduction in demand; and consumers may pay more, depending on how importers and sellers deal with the increased costs. 

Also, studies suggest tariffs are not the job generators their proponents claim. Increasing the price of components and raw materials like steel results in higher input costs for domestic manufacturers that rely on these imports. Hence, these enterprises have less money to invest in labor, innovation, and other parts of their businesses. Furthermore, one person’s tariff-related job gain is another person’s loss because the penalized country usually retaliates by imposing tariffs on goods imported from America, making them less competitive. As retaliations escalate, trade wars ensue, costing more jobs. 

Meanwhile, the power of tariffs to boost price competitiveness in home markets is not necessarily a quick fix. It takes time for a domestic manufacturer to ramp up its supply chain to take advantage of the change in the competitive landscape. That landscape will probably become more hostile again as manufacturers in low-cost countries not targeted by tariffs see a market opportunity.  

Still, the tariff mechanism does punish foreign countries that have fallen out of favor and can enable domestic producers in the US to gain market share. The mechanism is relatively easy to implement—the US President can impose them without recourse to Congress—and takes effect relatively quickly. 

And notwithstanding the above drawbacks, there can be persuasive reasons for using tariffs to combat unfair trade practices. An example is the vast government subsidies that give Chinese manufacturers an edge in the global marketplace. The Wall Street Journal reports these subsidies amount to almost 5% of China’s annual national income, dwarfing the billions in subsidies that the Biden administration gives to strategic US industries such as microprocessor manufacturing. Even Europe’s economic powerhouse, Germany, is grappling with the economic fallout from China’s trade onslaught. 

On balance, are tariffs effective, or do they cause more harm than good?

The answer is all the above, depending on how they are employed. Used strategically as part of a carefully crafted program that could include other mechanisms, such as industrial policies that support domestic companies, tariffs can help to promote healthy competition.

Unfortunately, in today’s climate of confrontational politics, such a rational approach can be elusive.