24 Tariff Questions Answered Using Research And Statistics
All sources are linked in the Google Doc above. I recommend opening this document while reading this post for full context!
What is a tariff? A tariff is a tax on foreign goods coming into a country, also known as imports. Tariffs are paid by the purchaser of the import to the customs agency and they can either be flat rate or a percentage.
As an example, say someone in the US is buying a pair of jeans from Japan that costs $100. A $5 tariff means the US consumer now has to pay $105, $100 to the seller and $5 to the customs agency. However, a 5% tariff means that the US consumer now has to pay $105, $100 to the seller and $5 to the customs agency… Yeah, I probably could’ve used some better numbers.
Pretty much every country uses tariffs to varying degrees, with developing countries having much higher rates than developed countries - I’ll explain why shortly.
In the US, tariffs were their main source of income in their initial years as a nation, and they’ve been in the news recently due to Donald Trump winning the 2024 US Presidential Election, and it is super cool and not concerning that “What is a tariff” peaked on Google Trends days after the election happened!
What is Trump’s current tariff plan? Throughout Trump’s presidential campaign, he has promised to apply a tariff on all imports into the US, and at an especially high rate on Chinese imports. The tariff rate proposed varied in every interview, but as of today, the 18th of December, the most common figures he’s quoted are 10% or 20% for all countries, and at least 60% for China.
On November 26th, he threatened to levy an additional 25% tariffs on Canadian and Mexican imports and Chinese imports by additional 10%, which he said will be part of his first Executive Orders.
On November 30th, Trump also threatened 100% tariffs on BRICS nations if they were to create their own currency to challenge the U.S. dollar as the global reserve currency.
With the most recent estimates of the average U.S. tariff rate at 1.47%, Trump’s current tariff plan, if they were to go ahead as they are, would drastically change their foreign and economic policy.
What do economists think of tariffs? It’s hard for economists to be unanimous on many topics but when it comes to tariffs, pretty much every economist doesn’t like tariffs. The main reason being that tariffs restrict free trade by disrupting global economies and stopping people from accessing cheaper, and potentially better quality goods. In a global economy, countries specialize in what they have a comparative advantage in.
For example, India has a comparative advantage in producing bananas, compared to, say, Sweden. India’s climate, soil, and agricultural infrastructure all contribute to them being the largest banana producer in the world. If Sweden were to levy a tariff on Indian bananas, Sweden will either have to pay a higher price for Indian bananas, buy bananas that were grown in the snow, or not buy bananas at all. All these situations are worse than if the tariff was never levied.
What do economists think of Trump’s tariff plan? Building off the previous answer, economists pretty much universally do not like Trump’s tariff plan. A majority of economists say that American households will suffer the most from tariffs, supply chains will be disrupted, and the tariffs could potentially cause a trade war and decrease global GDP.
Some Trump-aligned, conservative economists argue that the tariffs will incentivize manufacturing in the U.S., reduce the deficit by raising revenue, and counter China’s unfair trade practices.
Why would a country implement tariffs? So if most economists hate tariffs, why would a country have them, keeping in mind that pretty much all countries have tariffs?
While they do restrict global trade, there are several advantages of tariffs. Firstly, they protect domestic producers. Perhaps a country’s politicians have been lobbied by their domestic industry, or, less cynically, it’s an industry they really want to grow. This is why developing countries have such high tariff rates, they want their domestic producers to flourish and not be out-competed by large corporations from developed countries.
In 2018, Trump levied tariffs on steel because he wanted to bring steel manufacturing jobs back to the U.S, after years of being outsourced to foreign countries.
Another reason is to be used as political leverage. Trump levied the 25% tariffs against Canada and Mexico specifically for the purposes of forcing them to act on illegal fentanyl smuggling and illegal border crossings, respectively.
And, lastly, tariffs can be used as a form of revenue collection for the government, just like any other tax.
Why does Trump want to implement tariffs? As mentioned before, the tariffs threatened against Canada, Mexico and the BRICS nations in late November were for political leverage reasons.
As for the 10 or 20% broad based tariffs, I think journalist David Rennie put it best in an Economist podcast, where he described Trump believing the U.S. economy is the most valuable piece of real estate, and foreigners should pay a high amount of rent to come in. And, as Trump sees it, foreign countries aren’t paying enough rent to access the U.S. market.
For whatever reason, Trump has the view that countries with trade deficits are losers when it comes to global trade. Trade deficits being the situation when a country buys more from a foreign country than the foreign country buys from the original country.
According to a different Economist podcast, in Trump’s first term, before he met with foreign leaders, he would ask about trade balance of the leader’s country with the U.S, and would berate any leader with a trade surplus over the U.S.
His view is that, by buying products from overseas, the U.S. is giving other countries their money, and are therefore losers in the deal, never mind the cheaper (and in some cases better) products the U.S. now has access to. Trump would prefer a U.S. economy with strong manufacturing and to bring back domestic production, rather than rely on foreign countries for goods - and he believes tariffs are the way to reach this goal.
To Trump’s disgust, over the past few decades, the United States’ global trade balance has been at a major deficit, the biggest in the world, with China having the largest trade surplus against the United States. Trump has threatened larger tariffs against China because of this reason, and because he thinks China steals the U.S.’s intellectual property and they manipulate their currency to appear weaker, which makes their products artificially more attractive.
And to be fair to Trump, there is basis these. In a 2019 survey, 1 in 5 companies said their IP was stolen by China in the past year, and criticisms about China’s currency manipulation stems all the way back to 2003.
How have markets reacted to Trump’s tariffs? Trump’s win in early November saw jumps in the U.S. stock market, U.S. Dollar, crypto, and bond yields.
However it’s difficult to allocate how much of this was due to tariffs, since Trump said a loooot of things is going to happen during his second term.
If we look at what happened to markets after Trump’s Truth Social posts, the U.S. Dollar rose against the Mexican Peso, Canadian Dollar and Chinese Yuan but, interestingly, the stock market was largely unaffected.
This is probably because investors are betting these tariffs won’t actually be levied, they’re just a negotiating tactic.
How have other countries reacted to Trump’s tariffs so far? After Trump made his Truth Social posts, Canadian Prime Minister Justin Trudeau flew to Trump’s Mar-a-lago resort to convince him to call off the tariffs, and has recently vowed to retaliate with their own tariffs.
Mexican President Claudia Sheinbaum discussed the tariffs over a friendly phone call after publicly saying Mexico would retaliate with tariffs as well. The U.S. is Canada and Mexico’s largest export destination, representing 75% and 83% of their exports respectively, so it’s fair to say that they aren’t happy with tariffs slapped against them. And add to that they’re the U.S.’s closest allies, so it’s no wonder they are so responsive.
China, of course, is not happy with the tariffs placed upon them. Several key spokespeople have said a trade war isn’t in anyone’s best interests, and tariffs won’t solve their problems.
In terms of other countries, many countries aren’t happy and are weighing up how to respond to the tariffs. Countries with trade surpluses against the U.S., for example South Korea and India, are considering buying more U.S. products to get on the U.S.’s good side, and hopefully be exempt from the tariffs.
This is also the same view shared by EU Commissioner Ursula von der Leyen and the European Central Bank’s President, Christine Lagarde. While these responses are very tactful and much to Trump’s liking, behind closed doors, most countries are likely to levy retaliatory tariffs.
The EU reportedly already has a list of retaliatory tariffs drawn up, and many experts also expect China, as it did in 2018-19, to retaliate. Or not retaliate at all, I mean it’s really up in the air at this point, Trump’s not even the president yet... But they probably will, to be honest. Man, it is really great living in uncertain and trying times…
Who pays for tariffs? In terms of who makes the actual payment, it’s paid by the purchaser of the import to the customs agency.
In terms of tax incidence, as in who ultimately bears the burden of the tariff, economic theory says the buyer of the import pays for the tariff due to the elasticity of the world supply curve. If the buyer of an import is using the import as an intermediate good, they may pass on the cost to the final consumer of the product. For example, a baker importing butter could raise the prices of their cookies to cover the higher cost.
Another possibility is that the foreign seller, if they don’t want to lose a key customer, might make a concession and lower their prices for that particular customer, which means they implicitly pay for the tariff.
The third option is that the tariff cost is shared between the buyer and the seller. The last 2 options are only possible if the buyer of the import has much higher market power than the seller.
Who will pay for Trump’s new tariffs? Economists are quite universal in saying that American consumers will be the ones who bear the burden of the tariffs, despite Trump constantly repeating that China will be the ones paying for it.
Oh hey, and here’s Trump after winning the election saying that the tariffs may actually cause prices to rise! Very cool! Estimates vary but American households are forecast to pay up to $7,600 a year on the tariffs.
How do we know it’s U.S. consumers that will be paying for the tariffs? There are a few ways we know.
Firstly, companies heavily affected by tariffs have already publicized that they are raising their prices because of the tariffs.
Secondly, the U.S. likely doesn’t have the market power to force other countries to pay for the tariff. The U.S. makes up 13% of all global imports, which is huge… but it’s also much smaller than 87%. Countries affected by the tariffs don’t really have an incentive to lower their prices when they could very likely find a customer from a different country.
And lastly, experts are pretty confident that American consumers will pay for Trump’s new tariffs because…
Who paid for Trump’s tariffs in 2018-19? They paid for them when Trump first levied tariffs in 2018-19.
It’s been more than 5 years since Trump first implemented his tariffs, and there has been a lot of high quality research into their effects on the U.S. economy. One of the most highly cited studies found that the incidence of the tariffs fell entirely on U.S. consumers, and reduced real income by $1.4 billion a month, by the end of 2018.
And building on their initial findings a year later, the authors found that the tariffs continued to be mostly borne by U.S. consumers and importers. One of the only exceptions being the steel industry, where foreign exporters lowered their prices.
Will Trump’s tariffs be inflationary? Yes, the U.S. relies on many imports for their economy. In 2023, the U.S. imported $3.1 trillion worth of goods, making them the largest importer in the world. More than 15% of the GDP is imports. Nearly $500 billion worth of computers and electronics were imported in 2022. 60% of U.S. fresh fruit and 40% of vegetables are imported. 22% of intermediate inputs in various industries are imported.
So that’s all to say: the U.S. relies on a lot of imports. All of these products are likely to become more expensive, and it’s U.S. consumers who will pay for the increases, so, yes, Trump’s new tariffs are very likely to be inflationary. Which is annoying, because I just made a video about how inflation was now much lower.
But it doesn’t stop there: there is also a possibility that domestically produced goods will be more expensive as well. Domestic producers seeing foreign competitors with a higher price tag may be inclined to raise their own prices as well. That is the law of supply, after all - more consumers switching over and buying domestic goods instead of foreign goods will raise the prices of domestic goods.
Another way is through the power of complementary goods. An appliance retailer that sells foreign washing machines might raise the prices of domestically made dryers. Because if you buy a washing machine, you’re going to need a dryer! Of course, these are just hypotheticals and - oh, that’s exactly what happened in 2018.
Why will Trump’s tariffs be inflationary when they weren’t in 2018-19? Firstly, it’s true that overall inflation in the U.S. was quite low throughout 2018 and 2019. However, as mentioned before, higher prices were present in most of the specific and adjacent industries targeted by Trump’s first term tariffs.
Secondly, countries like China were able to bypass some tariffs by exporting goods to countries in South East Asia or Mexico, have them transformed enough to be labelled a different good, and then have them exported to the US. Chinese companies have even set up manufacturing hubs in Mexico to get past the tariffs.
Finally, while tariffs were a major theme in Trump’s first term, they were only applied to around $380 billion worth of goods… which is not much in the wider scope of the U.S. economy. If Trump were to apply a broad based tariff on all imported goods, it would be applied on more than $3 trillion worth of goods. This is 8 times the size of the tariffs in the first term, so you can imagine the inflationary effect will be much larger this time around. The tariffs won’t just be on specific industries in specific countries, they will be applied to everything and on every country. It will be much harder to try to get around these tariffs when they are applied everywhere.
How will Trump’s tariffs affect the US economy? Modelling by the Tax Foundation estimates that a universal 20% tariff plus an additional 50% tariff on Chinese imports will decrease US GDP by 1.3%, decrease GNP by 1.4%, decrease capital stock by 1% and reduce full time employment by 1.1 million people.
If countries partially retaliate, GDP falls by 1.7%, GNP by 1.9%, capital stock by 1.4%, and full time employment lower by 1.4 million people. The Budget Lab at Yale estimates that prices will rise between 1.4% and 5.1%, costing U.S. families between $1,900 and $7,600 a year.
Even only a 10% broad based tariff is widely expected to reduce GDP by 0.5%.
Now, take it from someone who has done forecasting for the past 3 years, it’s really unlikely that these numbers will materialize as they are, I mean these forecasts haven’t even factored in COVID-25!
Regardless of the actual numbers, the direction of travel is pretty clear - tariffs will harm the U.S. economy. Now add onto that that tariffs are regressive, poorer households will be more negatively affected than richer households.
On the other hand, conservative economists argue that the tariffs will bring back domestic manufacturing jobs and increase wages, like it did in 2018 and 2019… Speaking of which…
How did Trump’s 2018-19 tariffs affect the US economy? There was a working paper released in January 2024 that looked into the effects of Trump’s first term tariffs.
The authors, specifically David Autor, David Dorn, and Gordon Hanson, have previously written about China’s effects on jobs in the United States. In 2016, they found that China’s ascension into the WTO led to 2 million jobs being lost in the US - so they absolutely have the credibility and expertise to determine the employment effects of Trump’s tariffs.
In their most recent paper, they found that the tariffs insignificantly affected employment but retaliatory tariffs had significant negative impacts on employment.
That’s not to say that the initial tariffs created no jobs. Thousands of jobs were created in the steel industry and at washing machine factories. But studies show that each job costed American consumers $900,000 and $817,000 respectively. So, not the cheapest way of bringing back manufacturing.
Also interestingly, Autor and his co-authors found that the residents of tariff protected locations became less Democratic leaning and more likely to vote for Trump, despite being, you know, hurt by the tariffs - which is really great and cool to hear.
Why did Biden continue Trump’s 2018-19 tariffs? So it’s no secret that the Biden administration continued, and even increased Trump’s tariffs against China. But if Trump’s tariffs were so bad, why would they do this?
Well you see, when Biden does it, it’s a good thing, and when Trump does it, it’s a bad thing. Next question.
Ok seriously, Biden hasn’t been as vocal about tariffs as Trump has but from what I can gather, he’s kept and introduced new tariffs for a few reasons. Biden doesn’t want to appear weak about China, and if he removes Trump’s tariffs, it will appear as if he’s soft. Similar to Trump, trying to build up domestic production and protecting against China’s trade practices were also given as reasons. And, I mean, continuing to collect some tax revenue doesn’t hurt as well.
You can argue if this was a good decision or not but those are the reasons why he did it.
How will Trump’s tariffs affect the rest of the world? There are several ways this could play out. If all countries reply with retaliatory tariffs, this will cause a global trade war, global GDP is expected to fall and inflation is expected to rise - creating a global economy of stagflation and deglobalisation. Central banks will have a tricky time balancing pursuing economic growth or lowering inflation, just like they have been in the past few years.
Even if tariffs were only imposed on China, most countries have a strong trading relationship with China. So if China’s GDP falls, the rest of the world will indirectly slow down as well. If China were to export less goods, they wouldn’t need to buy as many inputs anymore. And that would screw Australia, for example, who export a lot of iron ore to China.
And it would be a lot worse if China replied with retaliatory tariffs, since most countries also have a strong trading relationship with the US.
Another scenario that has been argued is that inflation around the world (except in the US) could actually fall - this is because large exporting countries like China will likely find a destination for all their cheap products in other countries. In this scenario, all countries except for the United States may become closer and build stronger trading relationships with each other.
However, countries may not want their economies flooded with Chinese goods, so they may put up protectionist measures of their own. This would further ingrain a deglobalized macroenvironment, and bring us back to the first scenario where we are facing a global trade war.
Can Trump unilaterally impose tariffs all by himself? Yes, he can. Unfortunately for myself, I had to read into U.S. politics more to confirm this.
Article 1, Section 8 of the U.S. Constitution gives the U.S. Congress full power in levying taxes and regulating commerce with foreign countries. However, since the 1960s, Congress has deferred authority to modify tariffs to the President through dozens of statutes.
For example, Section 232 of the Trade Expansion Act of 1962 allows a President to adjust tariffs on imports that threaten to impair U.S. national security.
Section 5(b) of the Trading with the Enemy Act allows Presidents to tariff imports during wars or emergency. This is what Nixon invoked when he issued tariffs in 1971.
Section 203 of the International Emergency Economic Powers Act (IEEPA) allows the same thing. This is what Trump invoked when he threatened Mexico with tariffs in 2019.
So, basically, if Trump was to declare that there was a threat to national security, a war or emergency, harms or potential harms to a US industry, or unfair trade practices, that would give him full power to implement tariffs.
Can tariff revenue replace income tax revenue? No. U.S. imported goods were worth $3.1 trillion in 2023, and the U.S. Government raises about $2 trillion in individual and corporate taxes. So the average tariff rate would need to be around 65% for tariff revenue to match that level.
And that’s assuming demand for imports is perfectly inelastic. In reality, a higher tariff rate will reduce the quantity demanded of imports, so even a 65% average tariff rate wouldn’t reach $2 trillion in revenue.
Modelling by the Peterson Institute found that tariff revenue is maximized at a rate of 50%, and even then, only $780 billion of tax revenue is collected, which is only 40% of the current income tax revenue.
And this is ignoring the negative effects to economic growth, which would shrink the revenue collection even more. And this is also ignoring the effects of retaliatory tariffs.
In Trump’s first term, 92% of the tariff revenue collected from China was used to bail out farmers who were negatively affected by China’s retaliatory tariffs. If it’s a similar situation this time round, the theoretical cap of $780 billion of tariff revenue will only be $62 billion after negatively affected industries are bailed out, which is 3% of current income tax levels.
Even Elon’s new Department of Government Efficiency would struggle to cut government spending down to that level.
Is Trump really going to implement tariffs or is it all a negotiation tactic? The stock market certainly thinks it’s just a negotiation tactic. The stock market was unresponsive to Trump’s tariffs claims, and has continued to rise ever since he won the election. As mentioned, tariffs will likely restrict global trade, at least in the short term, so one would expect the stock market to fall if tariffs were priced in.
Many experts also believe the Canada, Mexico and China tariffs announced late November to be negotiations as well. We know in Trump’s first term, he heavily threatened tariffs that never materialized or were much more tame than what he initially stated, and it could be the same here.
It’s hard to know for sure, until his first days in office - but Trump has been consistent about his desires to boost domestic production, and his disdain for trade deficits. It’s hard to imagine tariffs not being utilized at all during his second administration.
My opinion is that the most extreme tariff threats, like the one against BRICS nations, and ones against Canada and Mexico, are just negotiation tactics to get the countries to do what the US wants. A 10% or 20% broad based tariff + a higher rate against China is more likely to be followed through. Although, I do see Trump giving exemptions to allied countries that buy more US products or have a reason to be exempted.
I already mentioned South Korea and India, but Japan has been emphasizing their investments in the US economy and their defense sector helping the US’s regional security. Trump loves to call himself a deal maker, and as long as the US comes out ahead over another country, I don’t think he will punish a country with tariffs.
Why are people worried about Trump’s tariff plan when he’s not even the president yet? Yeah, so there have been a lot of videos and articles about Trump’s tariffs, and Biden is still the president. His most concrete tariff plan has been some Truth Social posts but it’s still important to cover how they will affect the world - there have already been very real effects from all the tariff talk.
Companies are already raising their prices in anticipation of the tariffs. Companies are also hoarding and buying as many non-perishables as they can ahead of potential tariffs. And countries are both secretly and openly preparing for a potential trade war between the two biggest economies.
The problem with Trump’s madman approach to politics, where he just says as much crazy stuff as he can, is that it also freaks out allies and countries that Trump would want to have on his side.
These are unstable, uncertain, and trying times - and everyone in the world is bracing for what’s about to come for the next four years.
Can anyone talk Trump out of tariffs? Trump’s disdain for trade deficits dates all the way back to the 80’s, when he publicly called out Japan for having a trade surplus over the U.S.
These days, his anger is with China, but the feelings remain - as long as the U.S. has a trade deficit, he will do everything he can to stop it; and tariffs are his weapon of choice. He’s repeated the word so many times throughout his presidential campaign, that it would be hard to imagine his second term without it.
Although, a politician not making good on their promises, imagine that!
Trump has also aligned his cabinet with his vision for tariffs. For example, Trump’s pick for the head of the Commerce Department, Howard Lutnick, has been a big proponent of tariffs.
Scott Bessent, Trump’s Treasury Department pick, has also expressed interest in a global economic reordering, and increasing tariffs on national security grounds.
Jamieson Greer, Trump’s pick as the US Trade Representative, worked for 3 years under Robert Lighthizer - Trump’s previous Trade Representative, who was a key figure in crafting and enacting Trump’s tariffs in his first term.
Really the only thing that might be able to talk Trump out of tariffs is the stock market. Trump has always been extremely proud of when the stock market rises, and it’s often the first thing he talks about when someone asks him about the economy.
So if the stock market is lower for a prolonged period in response to the tariffs, that might trigger him to loosen up or stop the tariffs completely.
Is tariff the most beautiful word in the dictionary? No, the most beautiful word in the dictionary is… um… highly subjective and depends on personal preferences, cultural influences, and emotional associations.
So, maybe to people who purposely like to disrupt global economies and raise prices on their own citizens it is, but for regular human beings, probably not.
Will Trump’s tariffs work? Ultimately, Trump just wants more things produced in the U.S., and based on what he’s said, ideally everything.
But it’s just not possible for companies to feasibly bring their entire supply chains to the US. Labour costs are too high, natural resources only exist in certain countries, and countries specialize in certain industries.
Trump is trying to force companies to make long-term supply chain decisions during unstable economic environments.
Sure, there are some distinct winners from the tariffs but they cause more harm than good. Of course, everything remains to be seen, and the effects of the tariffs will outlive Trump’s presidential term. Americans knowingly, or maybe not-so-knowingly, voted for this, so they’ll get what they asked for, or maybe what they didn’t ask for, and the rest of the world will also, unfortunately, get what they asked for.