The Deal with Tariffs

Tariffs—or talk of what they are—have perhaps never been so prevalent in the news (and Google searches, no doubt) as has been the case for the past few months. Tariffs became a hot topic of conversation—and the source of some confusion—in the final weeks of the presidential election and continuing with greater emphasis under the Trump administration.

Back to that “confusion” part. Despite that word being tossed around with abandon, many may be unaware of what a tariff really is and the potential impacts. Brian Kelly, PhD, associate professor in economics at the Albers School of Business and Economics, recently shared his insights into the ins and outs of tariffs—think of it as a kind of “Tariffs 101”—in this Q&A:

Q. In basic terms, what is a tariff?

Kelly: A tariff is a tax on imports. If you import a ton of steel with a value (a “dutiable value”) of $1,000 and the duty rate is 25%, you pay $250 in taxes.

Q. Does the U.S. already have tariffs in place?

Kelly: Yes, the U.S. has tariffs on lots of products and they can seem sort of random. For example, fresh cut roses have a rate of 6.8%, carnations, 3.2%. Wool sweaters are assessed at 4%, cotton sweaters at 5%. Bicycles face 5.5% or 11%, depending on the size of their wheels. Cars are assessed at 2.5%, light trucks such as pickups at 25%. Some tariffs are based on weight or number of pieces. Shelled peanuts, for example, face a tariff of 6.6 cents/kilogram. However, the average tariff rate is quite low, at a little more than 2%, and many items are “duty free,” with no tariff at all.

Q. What is the purpose and/or benefit of tariffs?

Kelly: Tariffs provide revenue for the federal government and protect domestic industries by raising U.S. prices and/or decreasing the quantity of imports. Until the early 1900’s, tariffs were the most important source of federal revenue and at the same time they raised the price of foreign manufactures imported into the United States. The main arguments for tariffs now are to protect existing U.S. industries from foreign competition by raising import prices and lowering import quantities and to encourage new manufacturing investment in the country as a way to circumvent tariffs.

Q. What are the drawbacks or negatives of tariffs?

Kelly: For the last century, tariffs have not comprised a large part of federal revenues and a very high tariff rate would discourage imports so much that tariff revenues would actually fall. So, the overall revenue impact of tariffs is modest at best. 

The flip side of protecting U.S. suppliers is that U.S. consumers are hurt—and by more than suppliers are helped! The domestic price increases that tariffs permit help U.S. supplies and hurt U.S. consumers, one for one. But the tax and higher prices also discourage consumption, meaning that there is less quantity of stuff than there would be, absent the tariff. This is a net loss for the U.S. economy. An additional effect, which has both good and bad aspects, is that tariffs slow the adjustment process as the U.S. economy’s advantages and disadvantages change over time. For example, we are likely growing more roses and fewer carnations than our soil types and technology would suggest due to their different tariff rates.

Q. What do you believe are the biggest myths or misconceptions about tariffs?

Kelly: That international entities pay the tariffs. My research, as well as that of many other researchers, has shown that tariffs are largely borne by U.S. consumers. A myth of equal standing—that while tariffs hurt the foreign exporters, they help the importing country. This would be true only if you felt that consumers and efficient supply chains don’t matter.

Q. Can you explain what the potential impacts would be to the consumer if the tariffs take effect in Canada and Mexico?

Kelly: If tariffs are placed on imports from Canada and Mexico, you will see three rather rapid impacts. Prices for goods that we source from those countries—natural gas, vehicles and vehicle parts, machinery, electronics and appliances, a batch of consumables such as winter vegetables and beer and many others—will quickly rise. Supplies of some goods may become chancy, such as grades of steel available only from other countries. And the affected countries will put retaliatory tariffs in place, decreasing U.S. exports and U.S. employment. 

Q. Anything else you’d like to add?

Kelly: The price increases from tariffs will hit the poorest segment of Americans the hardest and the riches segment the least. This is because poorer people spend a greater proportion of their income on current consumption and because each additional dollar they have to spend is relatively valuable to them—they have fewer dollars to begin with. Like many transaction taxes, tariffs are regressive, hurting low-income people the most.

Brian Kelly recently shared his thoughts on tariffs in an appearance on KING 5 New Day Northwest.