Examination of How Tariffs Influence Trade, Federal Income, Consumer Prices, and Domestic Industries
1. Overview of Tariffs and Their Role: Forbes1 defines tariffs as additional taxes on imported goods. They emphasized that the United States uses tariffs to negotiate more favorable trade deals and protect domestic industries from unfair competition. Half of U.S. imports originate from Canada, Mexico, and China — a figure that exceeds $1.3 trillion annually.
2. Implications for Consumer Prices and Industry: Imposing tariffs on Canada, Mexico, and China may raise consumer prices. Mexico provides 60% of the U.S. supply of fresh vegetables and 50% of its fruit, while Canada and Mexico collectively account for 70% of U.S. oil and gas imports. Energy prices could spike, leading to a potential $0.50 price increase per gallon of fuel for Midwestern consumers. The auto industry also relies on auto parts from these neighboring countries, further illustrating the broad impact tariffs can have on various sectors.
3. Historical Perspective and Government Revenue: Historically, tariffs once constituted 50–70% of federal income (from 1798 to 1913). However, current data shows that tariffs represent only about 2–3% of U.S. income, as income taxes have supplanted tariffs. The Trump administration has proposed using tariffs to build a sovereign wealth fund, although most sovereign wealth funds require budget surplus resources, which the U.S. does not have.
4. Regulatory Aspects of Tariff Collection: BNN Bloomberg2 explained that the U.S. Treasury Department sets the regulations for tariff collection, while U.S. Customs and Border Protection enforces and collects those tariffs. In practice, tariffs are paid by U.S. consumers in the form of higher prices, although sometimes businesses absorb some of the extra cost or foreign exporters reduce prices to remain competitive. Schemes to evade tariffs, such as mislabeling shipments or using alternate shipping countries, are not uncommon.
5. Importance of Domestic Manufacturing: TheAtlantic.com3 and the McKinsey Global Institute underscore that domestic manufacturing fosters nationwide growth, knowledge, and productivity. They note that sectors like production, agriculture, and resource extraction promote broad productivity gains. Using tariffs may allow a redirection of deficit spending or the potential elimination of some taxes, though excessive protectionism can lead to stagnation.
6. Historical Successes and Challenges: Asian countries in the 20th century deployed export-led growth strategies underpinned by tariffs and policy controls. However, cutting access to imported components can make domestic production more difficult. By buying American-made products consumers could circumvent sending additional revenue to the government via tariffs, but in many instances, foreign goods remain essential.
7. Strategic Protection and Retaliation Risks: The Economic Policy Institute’s publication “Everything you need to know, but were afraid to ask” to highlight that tariffs can protect strategically vital domestic sectors, especially those harmed by foreign subsidies or unfair labor and environmental practices. Examples include the U.S. steel and aluminum industries, which suffered due to global oversupply caused by subsidies abroad. However, retaliatory tariffs can harm domestic sectors, as evidenced in 2018 when many US farms went out of business after China’s retaliatory response to U.S. tariffs. This retaliation led to a $61 billion farm bailout; effectively nullifying tariff revenues received from other industries. Other considerations are the changes in currency, making exports more expensive or cheaper. Some countries will manipulate currency prices. Additionally, supply and demand may raise or lower prices as a direct result of trade wars.
8. Conclusion: While tariffs can be used beneficially in certain strategic contexts, they generally introduce complications such as increased prices, retaliatory policies, and currency shifts. These issues may ultimately diminish their effectiveness as a sustainable source of revenue or a tool for long-term economic stability.
- Forbes February 18, 2025. The Surprising History of Tariffs and Their Role in US Economic Policy
- BNN Bloomberg.ca/business/international/2025/02/04/how-do-tariffs-work-who-pays-who-collects-an-more
- www.theatlantic.com/politics/archive/2024/09/economic-arguments-tariffs-trump/680015
