Tariffs are the Answer?

"other countries are going to pay us back"

During the Harris Trump presidential debate Trump said “… we’re doing tariffs on other countries, other countries are going to finally after 75 years pay us back for all that we’ve done for the world, and the tariff will be substantial in some cases. I took in billions and billions of dollars, as you know, from China. In fact, as you know they never took the tariff off because it was so much money they can’t, it would totally destroy everything that they’re set out to do.” (ref) And his Agenda 47 platform document included this “For decades, the U.S. government received over 80% of its revenue through tariffs on foreign goods, instead of taxes on Americans.” (ref)

So can tariffs be used to generate revenue from other countries? Could the tariffs be used to fund the US government?

How Tariffs Work

A tariff is a duty or tax, collected on imported goods. Products that originate from outside of the US have to go through US customs who check for prohibited products and collect taxes and any other fees. You may be familiar with this process if you’ve ever brought a bottle of tequila back from a trip to Mexico. Foreign manufactures typically use an import broker to handle the required paperwork and logistics.

So how are tariffs collected? Imagine that you want to start a smart phone store and you’ve found a source in China where you can buy them for $500 each. When you place your order you’ll pay $500 plus shipping, taxes and handling fees for each phone and the Chinese manufacturer will get $500.

How is this different if there’s a 100% tariff? In that case the fees on the $500 phone would increase by $500. That means that the $500 phone would now cost $1,000 plus the usual fees. The Chinese manufacturer will still get their $500. Of course it’s unlikely that you’d be able to sell the phones at double the price, so you’d have to find another source or give up your dreams of a phone store. In simple terms, just as Mexico didn’t pay for the wall China won’t pay for the tariffs.

But as Trump said in his speech, “They (the Biden administration) didn’t take them (tariffs) off because there was so much money”. And it’s true that the Biden administration did keep some of the Trump era tariffs in place. So why place a tax on imported goods if the money is coming from the US consumer?

The answer is that tariffs aren’t used to generate income, but to make imported products more expensive. This can be used to protect US manufacturers from unfair competition, or protect a local manufacture of strategically important products like steel or computer chips.

Here’s an excerpt from a Biden White House publication explaining why tariffs were placed on Chinese solar cells. (ref)

“The tariff rate on solar cells (whether or not assembled into modules) will increase from 25% to 50% in 2024. The tariff increase will protect against China’s policy-driven overcapacity that depresses prices and inhibits the development of solar capacity outside of China. China has used unfair practices to dominate upwards of 80 to 90% of certain parts of the global solar supply chain, and is trying to maintain that status quo. Chinese policies and nonmarket practices are flooding global markets with artificially cheap solar modules and panels, undermining investment in solar manufacturing outside of China.”

Other products mentioned in the report include steel and aluminum, semiconductors, electric vehicles, batteries, and medical products.

So given the reality of how tariffs work, I have some observations and questions.

• Trump either believed that tariffs on Chinese products would be paid by China or he knew that they wouldn’t and didn’t care. This is troubling in either case.

• Most politicians and journalists are well informed. They know that large, universal tariffs don’t generate income and would result in a shock to the economy and their wealth. Why were they unwilling to challenge Trump’s obviously false claims during the election? What will their position be once he’s in power?

• Should US consumers pay higher prices for electric cars to protect US manufacturers, and what assurance is there that the money would lead to more and better jobs?

• Could tariffs paid by US consumers on the purchase of foreign EVs be returned to them in the form of rebates for the purchase of US models?

• BYD motors is a Chinese EV manufacturer that is close to eclipsing Tesla’s domination of the EV industry. How would Elon Musk’s role in the Trump administration affect tariff policy?

Leave a comment and let me know what you think.