By Mike Walden
I was introduced to the concept of tariffs over half a century ago when I took my first undergraduate economics class. While I remembered the definition for the next test, to be honest, I didn’t find tariffs all that interesting or important.
Who would have thought that 55 years later, tariffs would be one of the top topics of discussion? I’ve answered several media inquiries about them. I’ve talked about tariffs in my various public presentations, and attendees listen. Even people at the gym have asked me what I think about tariffs. Usually something only economists talk about now seems to be the “talk of the town.”
First, what are tariffs? They are a fee — some call them a tax — the federal government charges on a product or service imported from another country. The domestic company importing the foreign product or service is responsible for paying the tariff.
Why are tariffs used? There are numerous potential answers. One is to raise revenue for the federal government. In fact, for the first 150 years of our country, tariffs were the major source of revenue for the federal government.
Using tariffs can help shield domestic producers from foreign competition, and thereby encourage domestic companies to expand. Our first treasury secretary, Alexander Hamilton, promoted tariffs to build up U.S. industry. A modern version of this goal is using tariffs to make imports more expensive so as to encourage “reshoring” of U.S. firms that moved to foreign countries.
A more modern reason for applying tariffs is to express displeasure — some say “punish” — a foreign country, for actions the importing country doesn’t like. For example, tariffs have been used by the U.S. against China for allegedly subsidizing companies that sell products to the U.S., thereby making foreign trade unfair.
Also, recently President-elect Donald Trump has threatened to impose tariffs on Canada and Mexico if the countries don’t comply with some of his demands. Last is the notion of fairness. Some argue that since most countries use tariffs, the U.S. should also. Interestingly, among the countries with tariffs, tariffs used by the U.S. are some of the lowest.
My profession — economics — has long argued against tariffs. Economists’ point is simple: If a foreign country can make and sell a product to us at a lower price than required for that product to be made in the U.S., then why would we refuse that trade? Buying a foreign-made product at a lower price would leave consumers with more money to spend on other things, many of which would be made in our country.
While as a professional economist, I understand this logic, I also understand some counterpoints. Many people worry that in a world of free trade, the good-paying jobs may be taken by foreign countries, leaving mostly lower-paying jobs for U.S. workers. There’s also a viewpoint that our country should be self-sufficient for national security purposes in producing the basics of life.
There are other important questions about tariffs. One is, who ultimately pays the tariff? Although initially the payment is made by the company importing the product, the issue is whether that company passes that cost on to other entities. Indeed, research shows importers do attempt to make others pay at least some of the tariff. One is the ultimate consumer of the product, who faces a higher retail price to help compensate for the importer’s tariff payment. Another is the importer’s workers or other workers along the supply chain, who endure cost-cutting measures to offset the tariff’s cost.
A key second question is whether tariffs result in making U.S. manufacturing stronger and more competitive. The existing research suggests the answer is perhaps not. Recent analysis looked both at the “heyday” of U.S. tariffs in the late 19th century and recently imposed tariffs. In both cases, the results showed that domestic manufacturing did not prosper under the tariffs. However, questions may be raised about the recent research because it examined a period that was still impacted by the pandemic.
Yet the research does raise a concern about how foreign countries react to new U.S. tariffs. If, for example, foreign countries increase their tariffs and curtail buying U.S. exported products and services, there can be significant damage to the U.S. economy. U.S. exports account for over $3 trillion of revenue annually for U.S. companies, equal to 10% of total economic activity.
Some analysts argue that decision-makers are aware of the potential problems with tariffs, implying the threats to impose tariffs may be a bargaining chip in trade and other negotiations. For example, the agreement governing trade between the U.S., Mexico and Canada is set to be reviewed in 2026. Some experts think the incoming Trump administration is using talk about new tariffs as a tactic to be used in negotiations. Others have interpreted the tariff talk as leverage for making an agreement with Mexico and Canada over immigration.
Tariffs are a controversial economic tool with supporters and opponents, and pluses and minuses. Tariff talk has increased in recent months, and the talk will likely continue into next year. Watch for the details and attempt to read the nuances so you can decide where you stand on this long-used and debated economic tactic.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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