Explainer: Trump's trade war - Will tariffs help or hurt the US economy?

President Donald Trump signed an order on Saturday imposing stiff tariffs on imports from Mexico, Canada, and China, prompting swift retaliation.

Trump posted on social media that the tariffs were necessary “to protect Americans,” urging the three nations to take stronger measures to curb the manufacture and export of illicit fentanyl. He also called on Canada and Mexico to take further action to reduce illegal immigration into the U.S.

If sustained, these tariffs could significantly worsen inflation, potentially undermining the trust many voters placed in Trump to lower the costs of groceries, gasoline, housing, automobiles, and other goods, as he had promised.

But what exactly is a tariff, and how does it work? Let’s find out.

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% on passenger cars, for instance, and 6% on golf shoes. Tariffs can be lower for countries with which the United States has trade agreements. For example, most goods can move among the United States, Mexico and Canada tariff-free because of Trump’s US-Mexico-Canada trade agreement.

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

There’s much misinformation about who actually pays tariffs

President Donald Trump insists that they are paid for by foreign countries. In fact, its is importers — American companies — that pay tariffs, and the money goes to the US Treasury. Those companies, in turn, typically pass their higher costs on to 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 and try to maintain their market share in the United States. 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 U.S. 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 subsidize childcare. "Tariffs are the greatest thing ever invented,’’ Trump said at a rally in Flint, Michigan, during his presidential campaign.

As president, Trump imposed tariffs with a flourish — targeting imported solar panels, steel, aluminum and pretty much everything from China. “Tariff Man,” he called himself.

The United States in recent years 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 U.S. 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, like subsidizing 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% 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 Sept. 30, the government collected around $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 United States.

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% 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 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 right around 140,000. By comparison, Walmart alone employs 1.6 million people in the United States.

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.

Source: Associated Press