How US Tariffs Affect the Economy and Trade: A Comprehensive Guide

Tariffs are taxes imposed on imported goods by the government of the importing country. They are usually levied as a percentage of the value of the goods, but sometimes they are also based on the quantity, weight, or volume of the products. Tariffs are one of the oldest and most common forms of trade policy, dating back to the colonial era in the United States.

The main purposes of tariffs are to raise revenue for the government, to protect domestic industries from foreign competition, and to influence the behavior of trading partners. Tariffs can have various effects on the economy and trade, depending on their level, structure, and duration. In this article, we will explore some of the benefits and costs of tariffs, as well as some of the recent developments and controversies surrounding them.

Benefits of Tariffs

One of the main benefits of tariffs is that they can generate revenue for the government. According to the U.S. International Trade Commission (USITC), tariffs collected by the U.S. Customs and Border Protection (CBP) amounted to $71.9 billion in fiscal year 2020, accounting for 2.3% of total federal receipts. Tariffs can also help fund public goods and services, such as infrastructure, education, health care, and national defense.

Another benefit of tariffs is that they can protect domestic industries from foreign competition, especially in sectors that are considered strategic, sensitive, or vital for national security. Tariffs can increase the price of imported goods relative to domestic goods, making them less attractive for consumers and reducing their demand. This can help domestic producers maintain or increase their market share, output, employment, and profits.

A third benefit of tariffs is that they can influence the behavior of trading partners, either by inducing them to lower their own trade barriers or by retaliating against their unfair trade practices. Tariffs can be used as a bargaining tool or a leverage in trade negotiations, as well as a deterrent or a punishment for trade violations. For example, the U.S.-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) in 2020, was partly motivated by the threat of U.S. tariffs on Mexican and Canadian imports.

Costs of Tariffs

One of the main costs of tariffs is that they can increase the price of imported goods for consumers and businesses, reducing their purchasing power and welfare. According to a study by the Federal Reserve Bank of New York, U.S. tariffs imposed since 2018 have resulted in an annual cost of $831 per household on average. Tariffs can also increase the cost of inputs for domestic producers who rely on imported intermediate goods or raw materials, reducing their competitiveness and profitability.

Another cost of tariffs is that they can distort the allocation of resources in the economy, leading to inefficiency and waste. Tariffs can create a wedge between the domestic and world prices of goods, creating an artificial incentive for domestic producers to overproduce and underconsume relative to the optimal level. This can result in a deadweight loss for society, as well as environmental and social costs.

A third cost of tariffs is that they can trigger retaliation from trading partners, resulting in a trade war that harms both sides. Tariffs can provoke countermeasures from affected countries, who may impose their own tariffs or other trade restrictions on U.S. exports. This can reduce market access and export opportunities for U.S. producers, as well as increase trade tensions and uncertainty. For example, China has imposed retaliatory tariffs on $110 billion worth of U.S. goods since 2018, affecting sectors such as agriculture, manufacturing, and energy.

Recent Developments and Controversies

Tariffs have been a prominent and controversial issue in U.S. trade policy in recent years, especially under the administration of former President Donald Trump. Trump adopted a more protectionist and unilateral approach to trade, imposing tariffs on various countries and products under different legal authorities and justifications.

Some of the most notable examples include:

Section 201 tariffs on solar panels and washing machines from various countries in 2018
Section 232 tariffs on steel and aluminum from various countries in 2018
Section 301 tariffs on $550 billion worth of Chinese goods in 2018-2019
Section 232 tariffs on steel and aluminum derivatives from various countries in 2020
Section 301 tariffs on $7.5 billion worth of European goods in 2019-2020
Section 301 tariffs on $1.3 billion worth of French goods in 2020

These tariffs have been met with mixed reactions from different stakeholders and observers. Some have supported them as a necessary and effective way to address unfair trade practices by foreign countries, such as dumping, subsidies, intellectual property theft, currency manipulation, and national security threats. Others have opposed them as a costly and counterproductive way to harm U.S. consumers, businesses, allies, and the global trading system.

The current administration of President Joe Biden has signaled a more multilateral and cooperative approach to trade, but has not yet lifted or modified most of the tariffs imposed by Trump. Biden has expressed his willingness to work with allies and partners to resolve trade disputes and reform the World Trade Organization (WTO), but has also emphasized his commitment to defending U.S. interests and values.

Tariffs are a complex and contentious topic in U.S. trade policy, with both benefits and costs for the economy and trade. Tariffs can raise revenue for the government, protect domestic industries, and influence trading partners, but they can also increase prices, distort resources, and trigger retaliation. Tariffs have been used extensively and controversially by the U.S. in recent years, resulting in significant impacts and challenges for various sectors and countries.

The Impact of US Tariffs on Global Demand

The United States is one of the largest trading nations in the world, with a total export of $1.43 trillion and a total import of $2.41 trillion in 2022. The US trade policy has a significant influence on the global demand for goods and services, especially in the industries that are subject to tariffs or trade barriers. In this blog post, we will examine how the US tariffs imposed since 2018 have affected the global demand in three industries: steel, solar panels, and soybeans.

Steel Industry

The US imposed a 25% tariff on steel imports from most countries in March 2018, aiming to protect the domestic steel industry from foreign competition. According to the US International Trade Commission (USITC), the US steel imports decreased by 17% from 2018 to 2019, while the US steel exports increased by 1.4% in the same period. However, the US steel production only increased by 1.5% from 2018 to 2019, indicating that the tariff did not significantly boost the domestic steel output.

On the other hand, the US steel tariff had a negative impact on the global demand for steel, as it reduced the competitiveness of US steel-consuming industries such as construction, automotive, and machinery. The World Steel Association reported that the global steel demand growth slowed down from 4.6% in 2018 to 3.4% in 2019, and projected a further decline to -6.4% in 2020 due to the COVID-19 pandemic. The US steel tariff also triggered retaliatory measures from other countries, such as Canada, Mexico, and the European Union, which imposed tariffs on US steel and other products.

Solar Panel Industry

The US imposed a 30% tariff on solar panel imports from most countries in January 2018, aiming to support the domestic solar industry from cheap imports, mainly from China. According to the USITC, the US solar panel imports decreased by 40% from 2018 to 2019, while the US solar panel exports increased by 12% in the same period. However, the US solar panel production only increased by 3.6% from 2018 to 2019, indicating that the tariff did not significantly stimulate the domestic solar output.

On the other hand, the US solar panel tariff had a mixed impact on the global demand for solar panels, as it reduced the cost-effectiveness of solar energy in the US market, but also stimulated innovation and diversification in other markets. The Solar Energy Industries Association reported that the US solar installations grew by 23% in 2019, but could have been 15% higher without the tariff. The International Energy Agency reported that the global solar capacity increased by 12% in 2019, driven by strong growth in China, India, Europe, and Southeast Asia. The US solar panel tariff also encouraged some foreign manufacturers to relocate their production to avoid the tariff or to explore new technologies and markets.

Soybean Industry

The US imposed a 25% tariff on soybean imports from China in July 2018, as part of a broader trade dispute between the two countries. China retaliated by imposing a 25% tariff on soybean exports from the US, which was the largest soybean supplier to China before the trade war. According to the USITC, the US soybean exports to China decreased by 74% from 2018 to 2019, while the US soybean imports from China increased by 15% in the same period. However, the US soybean production decreased by 20% from 2018 to 2019, indicating that the tariff did not benefit the domestic soybean output.

On the other hand, the US soybean tariff had a positive impact on the global demand for soybeans, as it increased the market opportunities for other soybean exporters and importers. The Food and Agriculture Organization reported that the global soybean trade increased by 4.4% from 2018 to 2019, driven by strong demand from China and other Asian countries. The US soybean tariff also prompted China to diversify its soybean sources and reduce its dependence on US soybeans. Brazil became the largest soybean supplier to China in 2019, followed by Argentina and Uruguay.

The US tariffs imposed since 2018 have had varying effects on the global demand for different industries. While some industries experienced a decline in demand due to reduced competitiveness or retaliatory measures, others experienced an increase in demand due to innovation or diversification. The US tariffs also had implications for the bilateral trade relations between the US and other countries, as well as the multilateral trade system. The future of the US trade policy and its impact on the global demand will depend on the outcome of the ongoing trade negotiations and the recovery from the COVID-19 pandemic.

References:

https://core.ac.uk/download/pdf/6958854.pdf

https://core.ac.uk/download/pdf/6958854.pdf
https://wits.worldbank.org/CountryProfile/en/USA
https://www.seia.org/research-resources/us-solar-market-insight-2019-year-review
https://www.iea.org/reports/renewables-2020
http://www.fao.org/3/ca9509en/CA9509EN.pdf

https://www.usitc.gov/harmonized_tariff_information

https://hts.usitc.gov/

https://en.wikipedia.org/wiki/Tariff_in_United_States_history

https://ustr.gov/callout/us-harmonized-tariff-schedule-hts