Tariffs, Their Pros and Cons, with Examples

Why Tariffs Raise Prices

car in factory
••• Steel tariffs will raise the costs for auto manufacturers. Credit: Bill Pugliano/Getty Images

Tariffs are custom taxes that governments levy on imported goods. The tax is a percentage of the total cost of the product, including freight and insurance. It raises the price of the import. Those higher prices give an advantage to domestic products within the same market. They are used to protect a nation's industry. But tariffs are a barrier to international trade.  Over time, they reduce business for all countries.

Tariffs are also called customs, import duties, or import fees. They can be levied on exports, but that is very rare.

On average, tariffs are around 5 percent. Countries charge different tariff rates depending on the industry they are protecting. They also charge sales taxes, local taxes, and extra customs fees. Governments collect this at the time of customs clearance.

Countries waive tariffs when they have free trade agreements with each other. The United States has trade agreements with more than 20 countries. Smart U.S. businesses target their exports to these countries. They use trade agreements to execute an intelligent market entry strategy. Their foreign customers pay less for U.S. exports because they are tariff-free. 

The Harmonized Tariff Schedule lists the specific tariffs for all 99 categories of U.S. imports. It's called “harmonized” because it's based on the International Harmonized System.

It allows countries to classify trade goods uniformly between them. The system describes 5,300 items or most of the world's trade goods. The International Trade Commission publishes the Schedule. The U.S. Congress sets the tariffs.

The HTS is a guide. The U.S. Customs and Border Protection (or the customs office in a foreign country) is the final authority that determines the tariff.

It is the only agency that can provide legal advice. It also helps in determining the classification of your import. 

Pros and Cons

U.S. policymakers go back and forth on whether tariffs are good or not. When a domestic industry feels threatened, it asks Congress to tax its foreign competitors' imports. It helps that sector, and that often creates more jobs. That improves workers lives, but it also raises import prices. Tariffs always force a tradeoff between workers and consumers. 

Another disadvantage of tariffs is that other countries usually retaliate. They raise tariffs on similar products to protect their domestic industries. That leads to a downward economic spiral, as it did during the Great Depression of 1929

Examples

The following examples of U.S. tariffs illustrate how these import taxes function. They highlight their advantages and disadvantages throughout history.

On March 1, 2018, President Trump announced he would impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. He did it to add U.S. manufacturing jobs. But the tariff will raise costs for steel users, like automakers. They'll pass that onto consumers. The president can act without Congress' approval to curb imports that threaten national security.

The Commerce Department reported that dependence on imported metals threatens U.S. ability to make weapons. The tariff hurts China the most. Its economy depends heavily on steel exports. Trump's move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines.

In June 1930, the Smoot-Hawley Tariff  raised already-high tariffs on agricultural imports. Its purpose was to support U.S. farmers who had been ravaged by the Dust Bowl. The resulting high food prices hurt Americans who were suffering from the effects of the Great Depression. It also compelled other countries to retaliate with their own protectionism measures. As a result, world trade dropped 65 percent.

In 1922, Congress imposed the  Fordney-McCumber Tariff on imported products, especially agriculture.

Legislators were responding to a glut of farm products. During the World War I, European farmers couldn't produce. Other countries replaced their food supply. When the European farmers returned to production, it increased the food supply beyond global demand. As prices dropped, U.S. farmers complained.

On April 22, 1828, the federal government levied the Tariff of Abomination on most imports. It was designed to protect Northeast manufacturers. Instead, it hurt the South. That's because it did two things by raising prices on imports. First, it increased costs for most goods. That damaged the agrarian South the most.

Second, it reduced trade with England, the South's primary buyer of cotton. When British businesses couldn't compete with New England manufacturers, they bought less cotton. As a result, the South's costs rose, and its income fell. That's why Southerners called this tariff an abomination.

Opposition to the tariff helped elect Andrew Jackson to the presidency. He beat John Quincy Adams, who had approved it. Vice President John Calhoun drafted the South Carolina Exposition and Protest. It granted states the right to nullify any federal law they didn't like. In November 1832, the South Carolina legislature nullified the tariff. The action created a constitutional crisis over states' rights. In January 1833, the state backed down. But tensions remained high, contributing to the start of the Civil War. (Sources: Martin Kelly, "Tariff of Abominations," ThoughtCo. "History and Archives," U.S. House of Representatives.)