The Many Sides of a Tariff

With tariffs a likely topic during tomorrow’s Harris/Trump debate, let’s take a look.

The Pros and Cons of Tariffs

Cons

As a tax on imported goods, tariffs have to be paid by someone. Many politicians like to say that other countries pay for tariffs. They do not. When the good enters the U.S., typically a business pays the tariff. So yes, the U.S. government gets revenue. However, at the same time, the importer increases that item’s price and eventually, the consumer pays.

You can see that tariffs’ share of federal revenue is way down:

In addition, it seems somewhat intuitive to say that tariffs protect U.S. industry. We can say “Yes,” but here too someone in the U.S. pays the price. If we are protecting domestic production with more expensive foreign goods, then the prices of similar locally made items tend to rise also, And furthermore, when you and I pay more for imported goods, then we have less to spend elsewhere. As a result, others suffer.

So finally, whether it is higher (inflationary) prices or shifting purchases, tariffs wind up constraining the growth of U.S. incomes. In a recent study, economists estimated that aggregate real U.S. income fell by $1.4 billion a month because of the 2018 tariffs.

And, it gets even worse if the tariffed nation decides to retaliate as indeed China did, Because of the retaliatory tariffs placed on U.S. agricultural exports, farmers received federal subsidies that were 92% of the collected duties.

Pros

I know we need to get to the pros of tariffs. I can only suggest that you look at this econlife that displays the jobs saved by a tire tariff and we have considered the massive upset that communities experience when factories close. And also, we should add protecting infant industries with tariffs–like EVs.

As economists, that leaves us where we always wind up–with cost and benefit.. And wondering why politicians tilt toward tariffs.

Our Bottom Line: Incidence

While taxes always have an impact, we can never be positive who will pay for them. Called the incidence of a tax by economists, they really just mean who pays.

This video explains the incidence of a tariff:

You can see who bears the burden of a tariff and why it is called an invisible tax:

My sources and more: Thanks to the More or Less podcast for inspiring today’s post on the pros and cons of tariffs. From there, the White House, the Tax Foundation and Brookings had more detail. Also, we used data from this paper to substantiate the impact of the 2018 tariffs.

Please note that this post was slightly edited after publication.