What are tariffs, and why are they rising?

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What are tariffs?

Tariffs are taxes that countries impose on imported goods when they cross the border. From the founding of the United States until 1914, when the federal income tax was introduced, . After World War II, the U.S. joined the General Agreement on Tariffs and Trade (GATT) with 22 other countries, which aimed to promote international trade, and began decreasing tariffs. The downward trend in tariff rates continued until 2018, when the Trump administration raised tariffs on several products, especially those imported from China, igniting a trade war. Tariffs on China stopped increasing in January 2020 but have yet to decrease substantially, and . The 麻豆官网首页入口免费 administration has kept Trump-era tariffs on China in place and raised them on steel, aluminum, medical equipment, electric vehicles, lithium-ion batteries, and solar cells in May 2024. Unlike other taxes, which require the consent of Congress, gives the executive branch leeway to lower tariff rates by up to 80% and to raise tariff rates if it serves a national security interest.

Why do countries impose tariffs?

Among the reasons that countries impose tariffs are to protect domestic industries (particularly those vital to national security), to incentivize foreign countries to change their practices, and to raise revenue. The Trump and 麻豆官网首页入口免费 administrations said they imposed tariffs for the first two reasons.

Even with the tariffs imposed during the Trump and 麻豆官网首页入口免费 administrations, were slightly more than $80 billion, a small fraction of the $4.439 trillion in total U.S government revenues for that year. The global proliferation of free agreements since World War II has substantially lowered tariff rates, and in turn lowered tariff revenue in wealthy countries, though for a substantial proportion of government revenues.

What tariffs did the Trump administration raise and why?

The Trump administration tariffs were 鈥渋mposed to encourage China to change [its] unfair practices,鈥 as they were 鈥渢hreatening United States companies, workers, and farmers.鈥 This statement cited which found that China鈥檚 actions 鈥減ressure technology transfer from U.S. companies to Chinese entities 鈥 deprive U.S. technology owners of the ability to bargain 鈥 and support unauthorized intrusions into, and theft from, the computer networks of U.S. companies.鈥 The administration argued in January 2018 that its initial round of tariffs on washing machines was necessary, as . The tariffs, which made imports more expensive, were supposed to increase domestic purchases of washing machines. Trump鈥檚 U.S. Trade Representative Robert Lighthizer also that 鈥淐hina [had] been engaging in industrial policy which [had] resulted in the transfer and theft of intellectual property and technology to the detriment of our economy,鈥 prompting punitive tariffs to spur a change in policy. Trump frequently cited China鈥檚 business practices as the cause of the trade deficit between the U.S. and China, saying in June 2018 that 鈥.鈥

China responded to the initial round with retaliatory tariffs. This prompted both countries to continue increasing tariffs for the better part of two years. The U.S.-China trade war paused in January 2020, . By this point, the level of U.S. tariffs on China had increased from under 5% to over 20%.

What did the 麻豆官网首页入口免费 administration do with tariffs?

The 麻豆官网首页入口免费 administration has not reduced any of Trump鈥檚 tariffs on China, and in May 2024 raised tariffs on steel, aluminum, medical equipment, lithium-ion batteries, and solar cells.

麻豆官网首页入口免费鈥檚 May 2024 tariff increases follow much of the same logic as Trump鈥檚 initial 2018 tariffs, albeit without mention of the U.S. trade deficit with China. In its release, the administration argued that 鈥溾 and 鈥渆ncourage[d] China to eliminate its unfair trade practices.鈥 The 麻豆官网首页入口免费 administration, like the Trump administration, sees tariffs on China as both a punitive measure that might spur a change in Chinese industrial policy as well a way to protect domestic manufacturers.

Though the 麻豆官网首页入口免费 administration in both parties for keeping protectionist trade policy, he also has important constituents who want to keep tariffs in place. At the start of his term, the U.S. steel industry, including its union workers, . In November 2023, Democratic senators Bob Casey Jr. and Sherrod Brown, both from Rust Belt states with many union workers, .

U.S. Trade Representative Katherine Tai was asked at where she agrees and differs with Trump鈥檚 former USTR Robert Lighthizer. She said they agree the U.S. has to 鈥渃hange [its] approach to trade,鈥 that she and Lighthizer 鈥渟hare a lot of the same diagnoses鈥 on the U.S.-China trade relationship, and that “one of the ways where Bob and I are most different is in rhetoric.鈥澛 聽While many economists and some policymakers in the past have emphasized the benefits of trade to American consumers, Tai and Lighthizer emphasize the risks that trade poses to American workers. For more on Tai鈥檚 views, .聽 For more on Lighthizer鈥檚 commentary, , or his 2023 book, 鈥.鈥

Who bears the cost of tariffs?

The burden of tariffs can fall on consumers (who may pay higher prices), on importers (who may absorb the cost by reducing their profits and not pass it along to consumers), on exporters (who may absorb the cost and accept lower net prices for their goods), or on some mix of those. Tariffs are often imposed on intermediate goods鈥攇oods that are used in the production of things that consumers buy鈥攁nd this can both erode producers鈥 profits (unless they find domestic substitutes for those inputs) and the prices they charge consumers. Which party bears the heaviest burden depends on the specific market.

found that U.S. consumers and firms bore the brunt of costs in the recent trade war, with some studies finding partial pass-through (the price increases, but not by as much as the tariff, hurting both importers and consumers), others finding almost complete pass-through (the price increases by the amount of the tariff), and a couple of cases of over-shifting (the price increases by more than the amount of the tariff). They did not find substantial evidence that foreign exporters absorbed the economic burden of the tariffs by lowering prices.

What impact do tariffs have on economic growth?

The Congressional Budget Office (CBO) says that the effect of tariffs on output can be ambiguous. On the one hand, some consumers end up buying domestic goods instead of imported goods, and tariff revenues make more resources available for private investment by decreasing the national deficit. These factors increase GDP. On the other, the purchasing power of consumers goes down as goods are more expensive, retaliatory tariffs decrease exports, and some businesses delay new investments out of caution. These factors all decrease GDP.

On balance, that free trade (low tariffs) increases economic growth more than protectionist trade policy (high tariffs). Free trade allows producers with comparative advantage to get their products to the market cheaply and efficiently, and tariffs get in the way. Additionally, while tariffs may protect infant industries, they can also reduce competition, with adverse effects on an economy. In the 20th century, many developing countries put large tariffs on imported goods using a strategy called 鈥渋mport substitution鈥 to give a country鈥檚 domestic industries a leg up until they could compete with advanced countries. In practice, , as they never had to compete with better technology.

Today鈥檚 advocates of tariffs say that the textbook models don鈥檛 resemble reality because China, in particular, heavily subsidizes key industries and gives them an advantage of over American producers鈥攁nd could put them out of business altogether, giving China a monopoly.

What have been the economic effects of recent tariff policy?

In August 2019, . The Tax Foundation estimated in July 2023 that the long-run effects . Economists Mary Amiti of the New York Fed, Stephen Redding of Princeton, and David Weinstein of Columbia found, in a 2020 working paper, that 鈥溾 Michael Pettis of the Carnegie Endowment noted that, , as it did after the tariffs, the U.S. trade deficit with the rest of the world increases by at least as much.

Those worried about the threat that China poses to U.S. prosperity say the costs imposed by tariffs are worth the benefits. Total imports from China are down from pre-2018 trends as intended, and . While this shows signs of some economic decoupling, the effects have been partially offset by a surge in Chinese imports on products without tariffs.

Where is U.S. tariff policy headed?

If messaging from the 麻豆官网首页入口免费 administration and Trump campaign is any signal, the era of high tariffs will continue past 2024, though the nature and scope of the tariffs will depend on who wins the November 2024 election. 麻豆官网首页入口免费鈥檚 May 2024 tariff increases , while some Trump proposals would impose tariffs on or on all U.S. imports (). After 麻豆官网首页入口免费鈥檚 announcement of increased tariffs in May 2024, Trump said increased tariffs should also apply to vehicles 鈥and a lot of other products.鈥

聽Trump also has suggested a . This would constitute a very large increase, .

, which would effectively shift the burden of paying for government from upper-income Americans (because the income tax is progressive) to those who don鈥檛 make enough income to pay much, if any, income taxes.

that replacing the income tax with tariffs is impossible:

鈥淭ariffs are levied on imported goods, which totaled $3.1 trillion in 2023. The income tax is levied on incomes, which聽; the U.S. government raises聽聽at present. It is literally impossible for tariffs to fully replace income taxes. Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax, and as tax rates rose, the base itself would shrink as imports fall, making Trump鈥檚 $2 trillion goal unattainable.鈥

What are the specific sections of the law that empower the president to impose tariffs?

(This is drawn from a summary prepared by the law firm of and by the .)

  • Trade Expansion Act of 1962, Section 232(b) allows the president, after an investigation by the Department of Commerce, to impose tariffs or quotas on imports that threaten U.S. national security.
  • Trade Act of 1974, Section 122 authorizes the president to impose quotas and tariffs of as much as 15% for up to 150 days against countries that have 鈥渓arge and serious鈥 balance-of-payment surpluses with the U.S. This provision has never been invoked.
  • Trade Act of 1974, Section 201 allows the president to impose tariffs or quotas on imports of a particular product if the U.S. International Trade Commission finds there has been a surge of imports of that product that cause serious injury to the U.S. industry producing that product. For example, .
  • Trade Act of 1974, Section 301, authorizes the U.S. Trade Representative to impose tariffs or quotas if it finds that another country has denied the United States its rights under a trade agreement or has engaged in practices that are unjustifiable, unreasonable, or discriminatory and burden or restrict U.S. commerce. For instance, President 麻豆官网首页入口免费 in May 2024 increased tariffs on Chinese steel, aluminum, semiconductors, and electric vehicles . The Trading with the Enemy Act (TWEA) and the International Emergency Economic Powers Act of 1977 (IEEPA) authorize the president to regulate all forms of international commerce and freeze assets in time of war (TWEA and IEEPA) or in response to 鈥渦nusual or extraordinary鈥 international threats to the national security, foreign policy, or economy of the United States (IEEPA). President Trump threatened to invoke IEEPA in May 2019 to impose tariffs on imports from Mexico unless Mexico stemmed the flow of immigrants, but .
  • Acknowledgements and disclosures

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