What is the significance of tariffs?

Tue Jan 28 2025
Eric Whitman (336 articles)
What is the significance of tariffs?

Donald Trump’s commitment to levying tariffs on imports of foreign goods and services constituted a fundamental aspect of his campaign discourse. He has previously wielded tariffs against Mexico, Canada, and Colombia, yet these actions were primarily threats aimed at securing political goals, particularly in relation to immigration cooperation. Amid the whirlwind of executive orders on his inaugural day, his approach to tariffs as a mechanism for recalibrating America’s trade relations with other countries amounted to merely initiating a study on the issue. A cursory examination of historical precedents indicates the possible risks and benefits associated with the implementation of this policy. It is evident that tariffs represent an increase in taxation. These represent fundamentally modest tax increases, as tariffs are levied on a maximum base of $3.257 trillion—the total annual value of goods and services imported by the United States. The personal income tax is levied on a significantly broader base amounting to $25.079 trillion. A 10% tariff would produce an impact comparable to a 1.3-point rise in personal tax rates.

Consequently, tariffs are unlikely to serve as a substantial source of revenue for the Treasury. Prior to January 2018, when Mr. Trump unveiled the initial phase of a series of tariff measures set to unfold over the next two years, tariffs contributed a negligible 1.1% to federal tax revenue. In July 2018, the tariffs implemented by Mr. Trump began to generate revenue for the Treasury. In the subsequent year, tariff collections increased to 2% of federal tax revenue—approximately twice the pre-tariff proportion, yet still negligible in the broader context. During his 2020 campaign, Joe Biden pledged to eliminate the tariffs imposed by Mr. Trump; however, upon assuming the presidency, he not only maintained them but also introduced additional tariffs of his own. Currently, tariffs account for 1.7% of federal revenue. The tariffs implemented during the first term of the Trump administration present a compelling case study for economic analysis. An examination of the impact of tariffs during the 20-month span from their introduction in July 2018 to February 2020 reveals significant insights, particularly in the context of the impending pandemic that would soon alter the economic landscape.

Did the tariffs contribute to inflationary pressures? No. The average inflation rate of the Consumer Price Index during the first 20 months of Mr. Trump’s tariffs was 2.1%, closely mirroring the 2.2% recorded in the preceding 20 months. Market participants express concern that the Federal Reserve may be maintaining a tighter policy stance than necessary, driven by apprehensions regarding the inflationary repercussions of impending tariffs. A policy misstep would emerge from the historical evidence, which indicates that baseless apprehension regarding tariffs could prove more detrimental than the tariffs in question. Have the tariffs influenced economic growth? No. The average annual growth rate of real gross domestic product stood at 2.7% during the first 20 months of Mr. Trump’s tariffs, encompassing both the most favorable and least favorable non-pandemic quarters of his administration. This figure closely mirrors the 2.9% observed over the preceding 20 months.

The pivotal question remains: did tariffs have an impact on the trade deficit? Their primary objective was to diminish it. Regrettably, that is not the case. During the first 20 months of Mr. Trump’s tariffs, the trade deficit relative to GDP maintained an average of 2.2%, consistent with the preceding 20 months. Currently, the trade deficit stands elevated at 2.5% of GDP, a consequence of the tariffs imposed during both the Trump and Biden administrations. What is the rationale behind the imposition of tariffs? Conversely, if their impact is minimal, what accounts for the considerable concern surrounding them? Mr. Trump’s proposals may have elicited apprehension, as they represent merely a segment of the president’s overarching strategy to reshape the entrenched framework of global trade, positioning America at its center and the U.S. dollar as the preeminent reserve currency worldwide. Mr. Trump has indeed pledged to uphold the dominance of the dollar, going so far as to threaten tariffs on any country that fails to respect this status. However, judging by the company he keeps, he seems prepared to disrupt the established order of global trade.

He has appointed Stephen Miran as the chairman of his Council of Economic Advisers. In November, Mr. Miran, serving as a strategist for hedge fund Hudson Bay Capital, put forth a case for implementing tariffs, instituting capital controls, taxing foreign investments in U.S. securities, devaluing the dollar, and even considering the sale of U.S. gold reserves. Mr. Miran refers to this initiative as a “restructuring of the global trading system.” Vice President JD Vance has asserted that the reserve-currency status of the U.S. dollar has played a significant role in the ongoing trade deficits and the artificially low borrowing costs, which have undermined America’s manufacturing sector and rendered the nation a debtor. Mr. Vance posits that we might find ourselves in a more advantageous position without it.

U.S. manufacturing employment reached its nadir in 2010—eight years prior to the imposition of Mr. Trump’s tariffs—and has experienced a steady increase thereafter, with the exception of a temporary decline during the pandemic. Among the Group of Seven nations, the United States shares the distinction of having the highest borrowing costs on long-term sovereign debt with the United Kingdom, a notable situation considering its status as a reserve currency. Should we venture to uncover what our borrowing costs might be in its absence?

Recent efforts to adjust the global trade framework have yielded no detrimental effects, yet they have similarly failed to produce significant benefits. The current system may not be perfect, yet Messrs. Trump, Vance, and Miran ought to acknowledge its development throughout the postwar era. The platform has facilitated multigenerational global prosperity and the progression of liberty. Any additional adjustments carry significant risks—particularly “restructuring”—with the prospect of minimal or no benefits. The Trump administration ought to prioritize policies that are likely to yield beneficial outcomes: addressing our borrowing costs through the reduction of debts and deficits, while fostering growth by safeguarding and extending the expiring elements of the 2017 Tax Cuts and Jobs Act.

Eric Whitman

Eric Whitman

Eric Whitman is our Senior Correspondent who has been reporting on Stock Market for last 5+ years. He handles news for UK and Europe. He is based in London