Understanding Tariffs

Keynesian economics, which is taught at colleges and universities around the country, explains that tariffs are a simple tax on imports. But they are not really that simple and without larger ramifications and are not just used for political posturing.

A larger tariff would benefit domestic producers if there was a manufacturing industry competing with the tariffed goods arriving from abroad. We are told that tariffs were a major source of U.S. government revenue during the 18^th and 19^th centuries.

Tariffs bring much political controversy. The U.S. has been a low tariff country with a few exceptions. Some countries, to protect their industries, levy heavy tariffs by as much as 100-400 percent to protect their domestic industries.

Canada provided a retaliation list of the items they are imposing tariffs on to match President Trump’s tariff of 25%. https://immigrationnewscanada.ca/us-goods-in-canada-affected-by-tariff/

President Trump announced in his Oval Office briefing today that Canada and India charge as much as 400% tariff tax on certain American products and farm produce. The United States charges European automakers only 2 ½% tariffs on European cars. European auto makers just announced, President Trump said, the lowering of their tariffs against U.S. car manufacturers to 2 ½%.

Major industries currently affected by tariffs are manufacturing of heavy machinery, autos, auto parts, consumer electronics, agricultural products, steel, and aluminum.

“A tariff handicaps all foreign suppliers equally, and it awards sales to those firms and nations that can supply the goods most cheaply, presumably because they are more efficient,” not because they may have cut corners in the production process or used substandard materials.

A type of disguised tariff is a quota. A quota is a government’s legal maximum amount of goods permitted into the country from abroad per year or some other unit of time. The few items enumerated under quotas are textiles, meat, and sugar. Quotas naturally raise the price of goods which are subject to quantity/number limitations because the supply is diminished, and we do not have much domestic production of said goods.

Sometimes the government provides payment to an exporter to reduce the exporter’s costs thus the exporter reduces their selling price of a specific good. Some governments use such export subsidies heavily to help their domestic exporters compete more easily with other countries.

A tariff is acknowledged to be more beneficial to domestic producers as they are not exposed to such a tax. A quota is more capricious as it can be rewarded to other countries based on political favoritism. For example, Keynesian economists believe that the “U.S. sugar quota was for years suspected of being a major source of corruption in the Caribbean” because of potential political favoritism.

The issue of tariffs and quotas is not as simple as it seems. A nation imposing higher tariffs will force the opposing countries to raise their own tariffs resulting in a trade war. Trade wars lead to a reduction of trade. Keynesian economists give as an example what happened to the world economy in the 1930s which helped prolong the worldwide depression.

If a country can impose tariffs and quotas without fear of retaliation, it will work, however when all countries are able to use them, everyone will lose eventually.

A country can restrict trade by tariffs to protect specific domestic industries from foreign competition. The “cheap foreign labor” argument pops up. The government can set up trade adjustment assistance for those hurt by foreign competition, i.e., specific unemployment benefits, loans, retraining programs, college courses, and other aid to workers and firms. At what point should such aid stop?

The third argument for trade protection in the form of tariffs and quotas would be to maintain national defense. If military parts and equipment is produced by a nation that has been or is suddenly becoming hostile, what would keep them from stopping the production and exportation to the U.S. of a strategic product?

President Trump placed tariffs in 2025 on imports from Canada, Mexico, and China with the goal to bring back manufacturing jobs or protect the existing domestic ones.

According to CEO Magazine, 25% tariffs on Canadian steel and aluminum affected the production costs of the auto industry which uses steel and aluminum. Some of the costs may be passed on to consumers. Supply chain disruption may affect the supply from Mexico and Canada. Companies affected are Ford, GM, Tesla, BorgWarner, and Aptiv, relying on global semiconductor supply chains.

President Trump imposed a 20% tariff on Chinese imports affecting everyone who uses many electronic components produced in China. Higher prices will be paid for smartphones and laptops. Supply chain disruptions will be expected, like the Covid ones resulting from the forced lockdowns.

The 20% tariff on Chinese imports will result on higher prices in retail and apparel industries such as Nike, Adidas, and companies like Walmart and Target. Higher costs for consumers, reduced profit margin, and potential reduction in consumer demand which may not be so devastating for consumers who already own too much stuff.

Companies like Nvidia, AMD, and Intel who produce their chips overseas, will have higher costs thus their production price increases may be passed on to the consumer. Impact of 2025 U.S. Tariffs on Key Industries and Companies

In the short run, prices may be higher in those industries affected by increased tariffs and supply chain disruptions may occur. Eventually, President Trump’s tariffs may help the (re)establishment of a domestic industry production and the creation of jobs unless it involves the type of jobs typically done robotically.