What are tariffs and how do they work?

Washington: Tariffs are in the news at the moment. Here’s what they are and what you need to know about them.

Tariffs are a tax on imports

Tariffs are typically charged as a percentage of the price a buyer pays a foreign seller. In the United States, tariffs are collected by Customs and Border Protection agents at 328 ports of entry across the country.

US tariff rates vary: they are generally 2.5 per cent on passenger cars, for instance, and 6 per cent on golf shoes. Tariffs can be lower for countries with which the US has trade agreements. For example, most goods can move between the United States, Mexico and Canada tariff-free because of Trump’s US-Mexico-Canada trade agreement.

President Donald Trump throws pens used to sign executive orders.Credit: AP

Mainstream economists are generally sceptical of tariffs, considering them a mostly inefficient way for governments to raise money and promote prosperity.

There’s much misinformation about who pays tariffs

President Donald Trump, a proponent of tariffs, insists that they are paid for by foreign countries. In fact, it is importers — American companies — that pay tariffs, and the money goes to the US Treasury. Those companies, in turn, typically pass their higher costs onto their customers in the form of higher prices. That’s why economists say consumers usually end up footing the bill for tariffs.

Still, tariffs can hurt foreign countries by making their products pricier and harder to sell abroad. Foreign companies might have to cut prices – and sacrifice profits – to offset the tariffs to try to maintain their market share in the US. Yang Zhou, an economist at Shanghai’s Fudan University, concluded in a study that Trump’s tariffs on Chinese goods inflicted more than three times as much damage to the Chinese economy as they did to the US economy.

What has Trump said about tariffs?

Trump has said tariffs will create more factory jobs, shrink the federal deficit, lower food prices and allow the government to subsidise childcare.

“Tariffs are the greatest thing ever invented,” Trump said at a rally in Flint, Michigan, during his presidential campaign.

In his first term as president, Trump imposed tariffs with a flourish, targeting imported solar panels, steel, aluminum and pretty much everything from China.

Justin Trudeau has been urged to match Donald Trump’s tariffs on Canada ″⁣dollar for dollar”. Credit: nna\NPearson

“Tariff Man,” he called himself.

Trump has promised even more and higher tariffs in his second term.

In recent years, the US has gradually retreated from its post-World War II role of promoting global free trade and lower tariffs. That shift has been a response to the loss of US manufacturing jobs, widely attributed to unfettered tree trade and an increasingly powerful China.

Tariffs are intended mainly to protect domestic industries

By raising the price of imports, tariffs can protect home-grown manufacturers. They may also serve to punish foreign countries for committing unfair trade practices, such as subsidising their exporters or dumping products at unfairly low prices.

Before the federal income tax was established in 1913, tariffs were a major revenue driver for the government. From 1790 to 1860, tariffs accounted for 90 per cent of federal revenue, according to Douglas Irwin, a Dartmouth College economist who has studied the history of trade policy.

Tariffs fell out of favour as global trade grew after World War II. The government needed vastly bigger revenue streams to finance its operations.

In the fiscal year that ended September 30, the government collected about $80 billion in tariffs and fees. That’s a trifle next to the $2.5 trillion that comes from individual income taxes and the $1.7 trillion from Social Security and Medicare taxes.

Still, Trump wants to enact a budget policy that resembles what was in place in the 19th century.

Tariffs can also be used to pressure other countries on issues that may or may not be related to trade. In 2019, for example, Trump used the threat of tariffs as leverage to persuade Mexico to crack down on waves of Central American migrants crossing Mexican territory on their way to the US.

Trump even sees tariffs as a way to prevent wars.

“I can do it with a phone call,” he said at an August rally in North Carolina.

If another country tries to start a war, he said he’d issue a threat:

“We’re going to charge you 100 per cent tariffs. And all of a sudden, the president or prime minister or dictator or whoever the hell is running the country says to me, ‘Sir, we won’t go to war’.”

Economists generally consider tariffs self-defeating

Tariffs raise costs for companies and consumers that rely on imports. They’re also likely to provoke retaliation.

The European Union, for example, punched back against Trump’s tariffs on steel and aluminum by taxing US products, from bourbon to Harley-Davidson motorcycles. Likewise, China responded to Trump’s trade war by slapping tariffs on American goods, including soybeans and pork in a calculated drive to hurt his supporters in farm country.

A study by economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard and the World Bank concluded that Trump’s had tariffs failed to restore jobs to the American heartland. The tariffs “neither raised nor lowered US employment” where they were supposed to protect jobs, the study found.

Despite Trump’s 2018 taxes on imported steel, for example, the number of jobs at US steel plants barely budged: they remained about 140,000. By comparison, Walmart alone employs 1.6 million people in the US.

Worse, the retaliatory taxes imposed by China and other nations on US goods had “negative employment impacts”, especially for farmers, the study found. These retaliatory tariffs were only partly offset by billions in government aid that Trump doled out to farmers. The Trump tariffs also damaged companies that relied on targeted imports.

If Trump’s trade war fizzled as policy, though, it succeeded as politics. The study found that support for Trump and Republican congressional candidates rose in areas most exposed to the import tariffs — the industrial Midwest and manufacturing-heavy southern states such as North Carolina and Tennessee.

AP