Editor’s Note: This article originally appeared on YourSource News (YSN), the official blog of BrandSource parent AVB Inc, and is reprinted with permission from the authors.
President-elect Trump has vowed to impose a 25% tariff on Canadian and Mexican imports and to collect an additional 10% on Chinese-made goods
Merriam-Webster defines a tariff as a schedule of duties imposed by a government on imported goods.
Back in 1776, there was no such thing as the IRS, income tax, capital gains, or even the Treasury Department. We had only one way to raise revenue: tariffs on imported products from other nations.
This was OK, as the new nation had few expenses except for the Revolutionary War, which cost the young country dearly in those early years.
Since we had no way to raise money, America began putting tariffs on imported products, and for over 100 years, that was our only means to pay government expenses. But as the country increased in size and complexity, it became clear that we needed to adopt a progressive income tax similar to what European economies had done for years. Although many would argue this point, income taxes were a better economic approach, as tariffs tend to be regressive. And in today’s world, the former is far better for the economy than the latter.
Tariffs today can target areas of the global economy that protect the U.S. from unfair import laws in other countries. However, tariffs and their revenue would never replace our current tax system. Tariffs, as they exist today, have not provided enough revenue to cover spending since the late 1800s. In 2023, duties on imports were about $70.9 billion, representing 1.59% of the $5 trillion we take in from income tax, corporate tax and Social Security and Medicare taxes. I estimate that about 90% of our revenue today comes from wages and taxes on businesses and corporations.
In order to have tariffs that effectively cover spending in 2024 in the U.S., they would have to be in the 80-90% range on every product. Please understand that tariffs are collected at the port and paid for by the importer, not the exporting country’s foreign government. So, an 80% tariff would be both regressive and inflationary because these costs would be passed on to businesses and consumers.
As we witnessed in 2018, our government raised tariffs on Chinese goods by $50 billion. Subsequently, China, with which the U.S. has a significant trade imbalance, retaliated with its own tariffs. The net proceeds our government received after this retaliatory action by China and other countries was 12%. This is the nature of tariffs: no one ever really wins, and they won’t even put a dent in our national debt.
As you can imagine, tariffs raise the price of every import and thus increase the inflation rate. Because America imports far more than we export, tariff wars generally do not end in our favor. Every country wants to do business on our soil because the U.S. consumer markets are larger than the next 10 nations combined.
In addition, raising tariffs provides a cover for U.S. corporations to raise prices at the wholesale level. For example, cocoa mostly comes from offshore. With high tariffs, U.S. companies that make and sell candy, ice cream and other chocolate products must raise prices to maintain profitability. Domestic producers can now charge more and raise prices.
Tariffs are a weapon we can use and should use with discretion to make sure we are treated fairly in the global marketplace, but I do not see a time when they can supply any more than a minor increase in revenue.
Tariffs are taxes, but not on foreign governments; they are taxes on American companies that import goods. A tariff is designed as a deterrent to incentivize countries to manufacture goods on American soil.
This is a profoundly complicated subject; I have tried to simplify it. Tariffs have been around for 250 years and will always be a function of governments worldwide. It is therefore crucial to understand how they work and affect our lives.
Learn more at yoursourcenews.com.
About the Author
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
