Daily we are inundated with news on Tariffs --- and much of it contradictory, incomplete, and politically driven. Many of you have asked me to provide a succinct overview on Tariffs. Certainly, a complex subject. Tariffs are more than taxes on imports --- they shape economies, influence trade, and serve as political tools. Their impact depends on goals like protecting industries, driving growth, or negotiating trade, making them a powerful yet complex force in global markets.

Tariffs are a form of taxation, and like all taxes, someone must pay. While tariffs are levied on imported goods at the border, the economic burden is passed on to businesses, consumers, or foreign producers. The question of who bears the cost and how tariffs affect the economy has long been debated. However, ultimately in the real world we all pay --- as this is just another form of taxation on us citizens consumers regardless of country of origin – Canada, US, Europe, Japan, etc.

In the following I am examining the effects of raising tariffs to Smoot-Hawley levels, the broader implications for the U.S. and global economies, and the specific ways tariffs influence prices, production, and international trade.

The Smoot-Hawley Tariff and Its Lessons

The Smoot-Hawley Tariff Act of 1930 was one of the most consequential tariff laws in U.S. history. It raised tariffs on over 20,000 imported goods, with rates averaging 40-50%. The law was initially intended to protect American industries and jobs during the Great Depression. However, the consequences were severe:

1. Retaliatory Tariffs: Many U.S. trading partners-imposed tariffs of their own, sharply reducing U.S. exports.

2. Higher Prices for Consumers: The cost of imported goods rose, making essential products more expensive.

3. Declining Global Trade: World trade plummeted by 66% between 1929 and 1934.

4. Economic Contraction: The tariffs worsened the Great Depression, with GDP falling further as trade collapsed.

If the U.S. were to raise overall tariffs to Smoot-Hawley levels today, the consequences would be similar, if not worse, given the current interconnected nature of the global economy. The U.S. imports over $3 trillion worth of goods annually. A return to Smoot-Hawley tariffs would mean:

---A sharp increase in prices for imported goods, impacting both consumers and businesses.

---Retaliatory tariffs from trading partners, reducing U.S. exports.

---Disruptions in global supply chains, hurting U.S. manufacturers that rely on imported components.

---A economic slowdown, as businesses adjust to higher costs and reduced market access.

Who Pays for Tariffs?

Tariffs function as a selective sales tax, targeting only foreign-produced goods. While the tax is collected at the border --- typically from importers or shipping companies --- the costs get passed along in several ways:

1. Consumers Pay More: Importers increase retail prices to offset the tariff.

2. Producers Receive Less: Foreign exporters may lower prices to remain competitive, absorbing some of the cost.

3. Domestic Manufacturers Face Higher Costs: Many U.S. companies rely on imported raw materials and components. Tariffs increase production costs, leading to higher prices for finished goods.

Case Study: Trump-Era Tariffs on China (2018--2020)

The Trump administration-imposed tariffs on $350 billion worth of Chinese goods, citing trade imbalances and intellectual property theft. Studies show:

---U.S. consumers and businesses bore over 90% of the costs, rather than Chinese exporters.

---The tariffs increased inflation by 0.3-0.5% annually.

---Job losses occurred in export-driven industries, especially agriculture.

The Macroeconomic Effects of Tariffs

1. Higher Domestic Prices and Consumer Burden

Because tariffs increase the cost of imports, domestic producers often raise their prices as well. While this might help certain industries (such as steel or textiles), the higher prices reduce consumer purchasing power.

For example, after the U.S. imposed 25% tariffs on steel imports in 2018, domestic steel prices rose by 40%. This increased costs for industries reliant on steel, such as automotive and construction, leading to job losses and reduced competitiveness.

Reported on February 11, 2025, in the Wall Street Journal ---“The real goal of US steel and aluminum companies in 2018 wanting tariffs was to boost their bottom lines --- allowing them to charge more. A sample outcome --- General Motors profits dented by a billion dollars equal to the pay of more than 10,000 employees. Tariffs also made US manufacturers less globally competitive and prompted retaliation that hurt American businesses --- including the steel and aluminum manufacturers.”

2. Exchange Rate Effects and Impact on Exports

When tariffs reduce imports, the demand for foreign currencies declines, strengthening the U.S. dollar. While this makes imports cheaper, it also makes U.S. exports more expensive, hurting manufacturers and farmers who rely on global markets.

However, if other countries retaliate with their own tariffs, the exchange rate effect may be offset. For example, China retaliated against U.S. tariffs with duties on soybeans, leading to a 33% drop in U.S. soybean exports in 2018.

3. Tariffs on Imported Components Raise Manufacturing Costs

The modern U.S. economy is deeply integrated with global supply chains. Many domestic manufacturers rely on imported components, which are subject to tariffs. This increases production costs and makes U.S. goods less competitive internationally.

For instance, American automakers import $70 billion worth of auto parts annually. A broad tariff increase would raise car prices, reduce demand, and force companies to cut jobs.

Impact on U.S. Citizens and Global Partners

Impact on U.S. Citizens:

---Higher Consumer Prices: Everyday goods, from electronics to clothing, become more expensive.

---Job Losses in Export-Driven Sectors: Retaliatory tariffs harm industries that depend on foreign markets.

---Reduced Economic Growth: Tariffs disrupt trade, investment, and manufacturing.

Impact on Foreign Citizens:

---Economic Disruptions: Countries exporting to the U.S. face lower demand, hurting their industries.

---Retaliatory Tariffs: U.S. goods become more expensive abroad, reducing American exports and hurting global trade.

---Potential Supply Chain Shifts: Companies may relocate production, affecting workers worldwide.

Conclusion: The Hidden Cost of Tariffs

While tariffs are often promoted as a tool to protect domestic industries, the evidence shows that they frequently increase prices for consumers, hurt exporters, and slow economic growth. The Smoot-Hawley experience and modern case studies illustrate that protectionist policies often backfire.

A broad return to high tariff levels would be economically damaging, raising costs, shrinking trade, and reducing U.S. competitiveness. Instead of tariffs, policymakers should focus on strategies such as trade agreements, innovation incentives, and workforce development to ensure a stronger and more competitive economy.

Where does Trump’s love affair with tariffs come from?

Donald Trump’s support for tariffs dates to the 1980s when he saw Japan’s growing economic power as a threat to the U.S., notably losing a bid for a famous piano, (A 58-key piano used in the classic film Casablanca), to a Japanese firm. In 1989, he called for a 15--20% tariff on Japanese imports, arguing that America was being exploited by countries like Japan, West Germany, Saudi Arabia, and South Korea. He claimed that Japan, unburdened by defense costs because the U.S. provided protection for free (certainly unsupported), had built a strong economy with unprecedented surpluses. Decades later, as president, Trump remained steadfast in his belief that tariffs were necessary to protect American industry, a conviction shaped by his business experiences in the 1980s.

We certainly cannot read Trump’s mind today --- nevertheless --- Trump’s tariff strategies mirror his business practices through aggressive negotiation, transactional thinking, and strong branding. Like in real estate, he uses extreme opening bids (high tariffs) as leverage to force better deals, prioritizing short-term wins over long-term stability. His messaging simplifies complex policies into bold narratives, appealing to his base. He embraces risk, adapting when necessary --- much like his business ventures, where he has both succeeded and faced setbacks. Additionally, his preference for direct deal-making over institutional frameworks reflects his broader distrust of bureaucracies. His trade policies align with his long-standing approach: high stakes bargaining, adaptability, and a focus on perception as much as results.

Ronald Regan, a Republican, a proponent of free trade, a President today’s Republicans’ frequently reference, said:

“Protectionism almost always ends up making the protected industry weaker and less able to compete against foreign imports.”

 

John Vidas --- February 2025