It looks like many businesses will be raising prices to at least maintain their already tight margins as tariff repercussions go mainstream in the US.
Trump’s tariff approach is more buckshot than single bullet
In a significant move early in his second term, President Donald Trump brought an end to decades of free trade with neighboring countries by introducing a 25% tariff on imports from Canada and Mexico. China received an across-the-board 10% tariff on its products, a wholesale move that adds to existing taxes on products like vehicles, semiconductors and solar cells, and introduces levies to all others. China, Canada and Mexico are the top exporters to the US with a combined 40% of goods, based on Commerce Department figures. This move could mark the first wave of tariffs introduced by Trump. He has suggested that future targets may include Russia, European nations, and a wider range of Latin American countries, among other foreign states.
What Should I Expect?
While Trump wields, US consumers and businesses may wither at least a bit under higher prices for products ranging from cars to cowboy boots to coffee. And Canadian whiskey.
Options for businesses and their customers include:
- Accepting higher prices
- Reducing spending
- Finding new vendors that offer lower prices
- Struggling to maintain quality
As things stand now, the charges on Mexico, Canada and China could cost the average American household an extra $830 a year, according to the Federation for Federal Tax Policy, part of the nonpartisan Tax Federation. Tariffs are taxes applied to imported goods, calculated as a percentage of the buyer's payment to a foreign seller. In the United States, these taxes are collected by Customs and Border Protection officers at 328 ports of entry nationwide.
The Rationale
Trump says the new charges will:
- Reduce the Federal deficit
- Cut “subsidizing” foreign countries
- Leverage the US’s plans for big changes international immigration policies
- Force curbs to illicit drug trafficking to the US
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Been There Before, But Not as Big
This is President Trump’s second go-round of imposing tariffs, and his broadest. He drew worldwide headlines during his first term with his controversial 2018 decision to impose tariffs on $60 billion worth of Chinese aluminum and steel imports. This followed his two other tariffs, on Chinese solar panels and imported washing machines.
Trump is not the first president to adopt this approach. During their presidencies, George W. Bush and Barack Obama also implemented targeted tariffs—Bush on foreign steel and Obama on Chinese tires. Both leaders justified these measures as necessary to safeguard domestic industries, particularly struggling sectors like America’s steel, as well as industries deemed vital to national security, such as military contractors.
Tariffs At Work
Governments typically implement two types of tariffs: “ad valorem” and “specific.”
Ad valorem tariffs are calculated as a fixed percentage of the product's value, meaning they fluctuate with changes in the product's price. In contrast, specific tariffs are set as a fixed monetary amount, remaining unchanged regardless of price variations. In some cases, governments may apply a combination of both tariffs simultaneously.
Most tariffs are set to expire after a few years or are revoked when the politicians who imposed them realize that they’re causing actual harm to the industry that they were trying to protect and the overall economy.
In the U.S., the idea of either using or eliminating tariffs invokes strong arguments from both sides.
Backers contend tariffs are necessary to shield jobs and wages from cheaper foreign labor
Tariff opponents, who call themselves “free traders,” argue that protecting industries from overseas competition can start retaliatory trade wars, hurt consumers, and unleash xenophobia. But the biggest argument against tariffs is that they destroy domestic jobs instead of protecting them (more on this later).
How Old Are Tariffs?
Tariffs have existed for centuries, often serving as a protective measure for the wealth of European nations. Historically, these trade barriers reflected a deep mistrust among trading countries, shaping the dynamics of international commerce.
Let’s turn our attention to the United States, where tariffs have been a key part of economic policy since the 1780s. The country’s first tariff, introduced in 1789, served a dual purpose: to generate revenue for a federal government burdened by substantial debt from the Revolutionary War and to shield emerging industries, such as cotton and armaments, from foreign competition.
For more than 230 years, the United States has strategically employed tariffs—both to shield domestic industries and generate revenue, as well as to wield economic influence on the global stage.
What Is Free Trade?
After the devastation of World War II, the U.S. stood alone as the most powerful nation on Earth since its robust manufacturing industries went untouched by bombs and bullets.
Free trade emerged as the guiding principle of the post-war world. The idea was simple: nations that freely exchange goods and services without barriers are far less likely to engage in conflict. The devastating toll of isolationism, protectionism, and xenophobia had fueled the war’s unprecedented destruction and loss of life. In contrast, free trade promised peace and prosperity—at least in theory.
Since 1945, America’s leadership as the free-trade champion has produced the World Trade Organization (or WTO — the referee and settler of trade disputes), as well as other free-trade pacts.
The most notable of these is the North American Free Trade Agreement (NAFTA). This agreement, signed in 1994, established a virtual free-trade zone from Mexico to the U.S. to Canada.
Are Tariffs Good or Bad?
Never forget Newton’s third law: For every action, there is an equal and opposite reaction. You mess with me, I’ll mess with you — and do something even worse than what you did to me. That’s why tariffs are downright stupid in most trading disputes between nations.
It’s tit for tat. There are no winners
Let’s look at Trump’s move in early 2018 to target China and impose tariffs on aluminum, steel, and a host of manufactured products. Right on cue, China slapped tariffs on U.S. agricultural, energy, and industrial products.
In fact, China began to avoid purchases of U.S. soybeans, a devastating outcome for those American farmers. Ever practical, the Chinese government wants Trump to come to his senses before both mighty nations engage in a full-blown trade war. Trump’s tariff decision caused the stock market to tank, destroying trillions of dollars of wealth in a single day.
Thankfully, after the 2020 elections, they began importing soybeans once more, but it was a terrifying moment for farmers.
And there’s clear evidence that tariffs destroy wealth in other ways, as well. Then-President Bush’s tariff on foreign steel in 2002 killed off some 200,000 jobs in feeder industries, and then-President Obama’s tariff on Chinese tires in 2009 effectively imposed a $1 billion tax on consumers while protecting a measly 1,200 domestic tire-industry jobs.
Which Way Is Best?
Supporters of tariffs, often called protectionists, are quick to argue that free trade unfairly disadvantages the United States. They point to nations like China, which have gained market share from U.S. industries through practices such as cheap labor and currency manipulation. However, addressing these tactics is precisely the role of the World Trade Organization.
Since the end of World War II, free global trade—championed by the U.S. and other leading nations—has benefited most Americans. By lowering the cost of household goods and creating new markets for American-made products, it has enriched everyday life and strengthened economic opportunities.
Let's also not forget that free trade has also lifted tens of millions of people around the world out of poverty. Think about that the next time some suggest a trade war is a good idea.
