What’s All This About Tariffs, Now?

On the campaign trail this year, President-elect Donald Trump stated that “Tariffs are the greatest thing ever invented.” He promised to place tariffs of up to 20% on goods from some countries. He floated the idea of a 60% tariff on imports from China.

And he mentioned a 200% tariff on Chinese cars imported to the U.S. through Mexico. (It’s worth noting that President Biden has also embraced tariffs).

Which begs the question: What is a tariff, anyway?

Simply put: It’s a tax imposed on imported goods – usually to protect local industries and raise revenue for the government. It makes foreign products more expensive, which influences what people buy.

Though many economists doubt the efficacy of tariffs, conceptually, there are potential benefits. They make imported goods more expensive, a potential boon for U.S. businesses. They bring in revenue for the government to use for public services and projects. And, as Trump has emphasized, they can be used as a bargaining chip in trade negotiations – encouraging companies to invest in the U.S. or forcing countries to lower their own tariffs or change policies.

On the other hand, tariffs make imported goods more expensive, which can limit product variety and availability (which typically hits lower-income consumers the hardest).

Other countries often respond to tariffs by imposing their own, which can lead to a trade war that damages both economies (with consumers ultimately paying the price). And they can have a distorting effect on markets; by protecting U.S. industries from competition, tariffs can make them less efficient and innovative in the long run.

So what? Whether economists like them or not, the U.S. government has deployed tariffs for decades. And it seems likely that the second Trump administration plans to take them to the next level. Whether the benefits will outweigh the costs remains to be seen.

Photo credit: iStock/Max Zolotukhin

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