President Donald Trump has announced that he would impose tariffs on imported steel and aluminum. Speaking with industry officials, Trump said, “We’re going to rebuild our steel industry. We’re going to rebuild our aluminum industry.” He continued, “The U.S. hasn’t been treated fairly. Next week, we’ll be imposing tariffs on steel imports and aluminum imports.”
On the same day, the President tweeted:
Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!
While the exact amount of tariffs has not been confirmed, the President has indicated that he favors tariffs of 25% on steel imports and 10% on imported aluminum. Similarly, the specifically affected countries were not called out, but it’s likely the President might exempt some of our closest trading partners.
The imposition of tariffs would, according to the President, level the playing field between the United States and countries like China. However, some economists worry that imposing tariffs simply invites retaliation – tit for tat. In other words, if you impose a tariff on my goods, I’ll impose a tariff on yours.
So what is a tariff exactly? A tariff is more or less a tax on imports (or exports, though this is less common). Tariffs are typically used for one, or sometimes both, of the following reasons:
- To make money.
- To protect industry from competition.
In the United States, the first tariff levied by our government (meaning outside of those nasty British tariffs) was adopted in 1789. The not-so-cleverly named Tariff Act of 1789 had, as its primary goals exactly the reasons as stated earlier: money and protectionism. It was spelled out as such in the Act, saying:
Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise…
That same year, the Treasury was charged with administering tariff laws. However, that role eventually would fall to the U.S. Customs Bureau, which was dissolved in 2003 in favor of the newly created Bureau of Customs and Border Protection.
Initially, the duty – meaning the money paid as a result of the tariffs – was defined as one of three kinds:
- Specific duty;
- Ad valorem duty; or
- Duty-free treatment.
A specific duty is a fixed amount of money that does not vary with the price of the goods. An example of a specific duty would be a tax of $10 per pound of sugar. In 1789, those specific duties were initially imposed on 36 goods, including beer, wine, and spirits, molasses, salt, and sugar, tobacco, tea, and coffee. If that sounds like mostly good stuff, you’re right. It was considered a luxury tax aimed at the wealthy.
An ad valorem duty is calculated as a fixed percentage of the value of the goods. An example of a specific ad valorem duty would be a tax of 20% on the value of cotton. In 1789, the ad valorem duties of 5-15% were imposed on most imports not otherwise excluded from tax and included china, stone, and glassware.
A duty-free treatment is exactly what it sounds like: those goods got a pass and were not taxed. In 1789, those included certain metals like brass and tinplates, iron and brass wire, cotton and wool, hides, furs, and skins.
Typically, the importer – not the end user as with sales tax – pays the tariff. However, the end user may absorb the cost since the price-to-market is impacted.
The idea, of course, is that the imposition of tariffs makes it more expensive to use foreign goods. In theory, that should mean a decline in imports (making those goods more expensive) and an uptick in the use of domestic goods (assuming that the goods are manufactured or available at home). In that way, some economists argue that it’s government intervention in a free market. However, others argue that the protection is warranted if it achieved a desirous result.
So do tariffs work? Not always as intended. Noted American economist Frank Taussig found hardly any advantage in the early use of tariffs, saying, “Little, if anything, was gained by the protection.”
Not gaining anything is one thing, but losing something is quite another. The Tariff Act of 1930, known as the Smoot-Hawley Tariff increased tariffs at unprecedented rates. The bill, signed into law by President Herbert Hoover over the protests of nearly 1,000 economists, pushed rates up for nearly 900 American duties. The act was meant to protect the U.S. economy and encourage domestic spending. The result, however, was a stake through the heart of global trade: European countries struck back with tariffs of their own. The resulting trade war is considered one of the factors that led to the Great Depression.
Today, countries tend to be more deliberate when it comes to tariffs. The Smoot-Hawley Tariff was a broad swipe at imports but most tariffs, like the current proposal, are more measured. However, a tariff on steel and aluminum isn’t the first of its kind from the White House: In January of this year, President Trump announced the imposition of tariffs on imported solar panels and washing machines, primarily aimed at China, South Korea, and Mexico.
Concerns over the latest announcement were immediately felt on Wall Street. The Dow Jones average plunged more than 500 points early Thursday afternoon.