Tariffs

Tariffs

 

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A tariff is a duty (tax) imposed by the government of a country or customs territory, or by a supranational union, on imports (or, exceptionally, exports) of goods. Besides being a source of revenue, import duties can also be a form of regulation of foreign trade and policy that burden foreign products to encourage or safeguard domestic industry. Protective tariffs are among the most widely used instruments of protectionism, along with import quotas and export quotas and other non-tariff barriers to trade.

 

Tariffs can be fixed (a constant sum per unit of imported goods or a percentage of the price) or variable (the amount varies according to the price). Tariffs on imports are designed to raise the price of imported goods and services to discourage consumption. The intention is for citizens to buy local products instead, thereby stimulating their country's economy. Tariffs therefore provide an incentive to develop production and replace imports with domestic products. 

 

Tariffs are meant to reduce pressure from foreign competition and reduce the trade deficit. They have historically been justified as a means to protect infant industries and to allow import substitution industrialization (industrializing a nation by replacing imported goods with domestic production). Tariffs may also be used to rectify artificially low prices for certain imported goods, due to 'dumping', export subsidies or currency manipulation. The effect is to raise the price of the goods in the destination country.

 

There is near unanimous consensus among economists that tariffs are self-defeating and have a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth. Although trade liberalization can sometimes result in large and unequally distributed losses and gains, and can, in the short run, cause significant economic dislocation of workers in import-competing sectors, free trade has advantages of lowering costs of goods and services for both producers and consumers. 

 

The economic burden of tariffs falls on the importer, the exporter, and the consumer. Often intended to protect specific industries, tariffs can end up backfiring and harming the industries they were intended to protect through rising input costs and retaliatory tariffs. Import tariffs can also harm domestic exporters by disrupting their supply chains and raising their input costs.

 

The Depression

 

During the Great Depression, high tariffs—particularly the Smoot-Hawley Tariff Act of 1930—severely harmed the U.S. economy. Intended to protect American industries by making foreign goods more expensive, the law raised tariffs on over 20,000 imported products to record levels. However, instead of helping, it backfired. Other countries retaliated by imposing their own steep tariffs on U.S. goods, causing a dramatic drop in international trade. American farmers and manufacturers, who relied heavily on exports, saw their foreign markets disappear. U.S. exports plummeted by 61% between 1929 and 1933, worsening the economic collapse.

 

The tariff war contributed to a worldwide decline in trade, with global commerce shrinking by 66% from 1929 to 1934. As foreign sales dried up, American businesses faced falling profits, leading to more layoffs and factory closures. Unemployment skyrocketed to 25% by 1933, deepening the Depression’s misery. The loss of export income also hurt banks, many of which had lent money to farms and businesses dependent on international trade. When these borrowers couldn’t repay their loans, thousands of banks failed, further destabilizing the economy.

 

Beyond economics, the Smoot-Hawley Tariff damaged diplomatic relations and fueled economic nationalism worldwide. Countries turned inward, abandoning cooperation just when global recovery efforts were needed most. Some historians argue that the trade wars of the 1930s worsened international tensions, setting the stage for World War II. The disastrous effects of Smoot-Hawley led to a shift in U.S. trade policy, with later laws like the Reciprocal Trade Agreements Act of 1934 seeking to lower tariffs and revive commerce. The episode remains a cautionary tale about how protectionist policies can backfire, harming the very economies they aim to protect.

 

China

 

China had 6% Tariffs on US Goods before Trump. It increased to 21% by 2019. America had none before Trump’s second term.

 

During President Biden's tenure, China maintained tariffs on American goods as part of the ongoing trade tensions. By June 2019, China's average tariffs on U.S. exports had increased to 20.7%, compared to 6.7% for other countries.  These tariffs targeted a wide range of products, including agricultural goods, automobiles, and energy exports. While there were discussions aimed at reducing these tariffs, significant changes did not occur during Biden's presidency.

 

During Trump's first presidency, China imposed tariffs on U.S. goods as a direct response to the tariffs Trump placed on Chinese imports. This marked the beginning of the U.S.-China trade war, which significantly altered trade relations between the two nations. Before the trade war, China's average tariff on U.S. goods was about 8%, but as tensions escalated, these rates increased substantially.

 

By mid-2019, China's average tariff on U.S. goods had risen to approximately 20.7%. These tariffs targeted a wide range of American exports, including soybeans, pork, beef, automobiles, and liquefied natural gas (LNG). The agricultural sector, in particular, was hit hard, as China was a major market for U.S. farm products. In retaliation, the U.S. also imposed higher tariffs on Chinese goods, deepening the economic standoff between the two countries.

 

In January 2020, the Phase One trade deal was signed, which led to some minor tariff reductions and commitments from China to increase purchases of U.S. goods. However, many tariffs remained in place even after the agreement. While the deal provided some relief, it did not fully resolve the trade tensions, leaving many tariffs intact as Trump’s presidency came to an end.

 

For most of Obama's presidency, China's average tariff on U.S. goods was around 5-9%, similar to what it applied to other trading partners. However, there were specific disputes where China imposed higher tariffs in response to U.S. trade actions. For example, in 2009, when the Obama administration placed tariffs on Chinese tires to protect U.S. manufacturers, China retaliated by imposing tariffs on American poultry and automotive products.

 

Mexico

 

Mexico costs America $150 billion a year in drugs and migrants crossing the border which in Trump’s eyes deserves a Tariff.

 

During Obama’s presidency, Mexico’s average tariff on U.S. goods was generally 0% for most products, thanks to the North American Free Trade Agreement (NAFTA), which had eliminated tariffs between the two countries since 1994.

 

However, in cases of trade disputes, Mexico imposed temporary retaliatory tariffs. For example, during the 2009 trucking dispute, Mexico applied tariffs on about 90 U.S. products, with rates ranging from 10% to 45%, targeting pork, apples, potatoes, and other goods. These tariffs remained in place until 2011, when the issue was resolved.

 

During Trump’s first term, Mexico generally maintained a 0% tariff on U.S. goods due to the North American Free Trade Agreement (NAFTA), which was still in effect until it was replaced by the United States-Mexico-Canada Agreement (USMCA) in 2020.

 

However, there were some retaliatory tariffs imposed by Mexico in response to Trump's trade policies. In 2018, Trump placed tariffs on Mexican steel (25%) and aluminum (10%), citing national security concerns. In retaliation, Mexico imposed tariffs ranging from 15% to 25% on $3 billion worth of U.S. goods, targeting pork, cheese, apples, whiskey, and potatoes. These tariffs remained until 2019, when both countries agreed to lift them as part of the USMCA negotiations.

 

Despite these disputes, most U.S. exports to Mexico remained tariff-free under NAFTA and later under USMCA.

 

During Biden’s presidency, Mexico generally did not impose significant tariffs on U.S. goods, as the United States-Mexico-Canada Agreement (USMCA) kept most trade tariff-free. However, some trade tensions and disputes led to targeted tariffs or restrictions.

 

One key issue was Mexico’s restrictions on U.S. genetically modified (GMO) corn, which led to a trade dispute under USMCA. While this was not a traditional tariff, it acted as a trade barrier, limiting U.S. agricultural exports. Additionally, Mexico maintained some tariffs on specific U.S. steel and aluminum products, particularly when the U.S. imposed duties on Mexican metals.

 

Overall, most U.S. exports to Mexico remained tariff-free under USMCA, with only occasional disputes leading to targeted tariffs or trade barriers.

 

The economic cost of immigration, including the presence of undocumented immigrants, is a complex and debated topic. Estimating the cost of allowing 20 million undocumented immigrants (primarily from Mexico, as you mentioned) is challenging, as various factors influence the economic impact, such as the fiscal contributions of immigrants, the costs of public services, and broader economic conditions.

Costs and Contributions:

1. Public Services:
   
   Undocumented immigrants often utilize public services such as healthcare, education, and law enforcement. These costs can vary widely depending on state policies and local conditions. Some estimates suggest that the cost of public services for undocumented immigrants could be in the range of $100 billion to $150 billion annually.
2. Economic Contributions:
   
   On the flip side, undocumented immigrants also contribute to the economy through labor, consumption, and taxes. They fill essential jobs, particularly in agriculture, construction, and hospitality. They also contribute to the economy by paying sales taxes and, in some cases, payroll taxes (though many may not qualify for benefits like Social Security or Medicare). Estimates suggest that undocumented immigrants contribute about $100 billion to $150 billion annually to the U.S. economy through their work and consumption.
3. Net Fiscal Impact:
   
   The net fiscal impact of undocumented immigration is debated, with studies suggesting a slightly negative or neutral effect at the federal level but a positive impact at the state and local levels, depending on the region. While the costs for federal services (e.g., healthcare, law enforcement) may be high, undocumented workers often pay more in taxes than they receive in benefits at the local and state levels, especially in areas with strong economic demand for low-wage labor.

Several studies from organizations like the National Academy of Sciences and the Cato Institute have tried to quantify the overall cost or benefit of immigration. One commonly cited figure is that the net cost to the federal government of providing services to undocumented immigrants (including those from Mexico) is roughly $50 billion per year. However, other studies argue that the economic contributions (via taxes and labor) outweigh the costs.

In the long term, many economists argue that immigrants, including the undocumented, help drive economic growth, especially in sectors that require low-skilled labor. Some studies indicate that the GDP could grow by around 0.3%annually due to immigration, helping offset some costs in the long run.

The exact cost to the U.S. economy of allowing 20 million undocumented immigrants (many from Mexico) is difficult to pinpoint with precision. Annual fiscal costs could be in the range of $100 billion to $150 billion, but these are somewhat offset by the economic contributions immigrants make, resulting in a neutral or slightly negative net impact at the federal level. The overall economic impact is highly dependent on the local labor market, immigration policies, and regional economies.

 

Canada

 

Canada started the Tariff war on Dairy in 2017. America did not have one.

 

During Obama’s presidency, Canada did not impose significant tariffs on U.S. goods. Both the U.S. and Canada were major trade partners, and their trade relationship was largely governed by the North American Free Trade Agreement (NAFTA), which had been in effect since 1994. Under NAFTA, most tariffs between the U.S. and Canada were eliminated, and trade between the two countries was generally tariff-free.

 

During President Trump’s first term, Canada did not impose significant new tariffs on U.S. goods, but there were some trade disputes and retaliatory tariffs resulting from the trade policies and actions of both countries. The U.S. and Canada were still operating under the North American Free Trade Agreement (NAFTA) at the time, until the agreement was replaced by the United States-Mexico-Canada Agreement (USMCA) in 2020. However, some notable trade issues arose under Trump’s first term:

 

1. U.S. Tariffs on Canadian Steel and Aluminum

In 2018, Trump imposed 25% tariffs on steel and 10% tariffs on aluminum imports from Canada, citing national security concerns. These tariffs were part of a broader move against other countries as well, but Canada was notably affected, given its role as a major supplier of steel and aluminum to the U.S.

 

2. Canada's Retaliatory Tariffs:

In response, Canada imposed retaliatory tariffs on U.S. goods, targeting about $16.6 billion worth of American products, including steel, aluminum, bourbon, ketchup, and other agricultural products. The tariffs varied from 10% to 25% on these goods. This marked a temporary escalation in trade tensions between the two countries.

 

3. Dairy and Agricultural Disputes:

Another area of contention was Canada’s dairy supply management system, which limited U.S. dairy exports to Canada. This was an ongoing issue, and during Trump’s first term, he consistently criticized Canada for restricting U.S. dairy exports. As part of the USMCA negotiations, Canada agreed to make some concessions in this area, opening up a bit more market access for U.S. dairy producers.

 

4. USMCA Replacement of NAFTA:

In 2018, the U.S. and Canada (along with Mexico) reached a deal on the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA. This new trade agreement addressed several issues, including intellectual property, agriculture, and labor rights. The USMCA was signed in November 2018 and officially replaced NAFTA in 2020.

 

Estimate of Total U.S. Aid to Canada (2009–2025): Given the modest amounts allocated each year, the total U.S. foreign aid to Canada since 2009 is likely under $100 million, possibly closer to $50 million when factoring in all initiatives up to the present. This figure includes environmental conservation efforts, research projects, and border-related assistance.

 

1. Dairy Tariffs (2017 – Present):

• Canada has long had tariffs on U.S. dairy products, as part of its supply management system that controls the production and pricing of dairy, poultry, and eggs. Under this system, Canada imposes tariffs on dairy products imported from outside its system, including from the U.S.
• The tariffs on U.S. dairy products became a point of contention during the renegotiation of the North American Free Trade Agreement (NAFTA), which resulted in the new United States-Mexico-Canada Agreement (USMCA) in 2018.
• The USMCA gave U.S. farmers better access to Canada’s dairy market, but Canada still maintains some tariffs on certain dairy products, leading to ongoing tension.

2. Softwood Lumber Tariffs (1980s – Present):

• One of the most enduring trade disputes between Canada and the U.S. has been over softwood lumber. The U.S. claims that Canada subsidizes its lumber industry, making Canadian lumber cheaper than American lumber, and therefore subjecting it to tariffs.
• The first major softwood lumber dispute began in the 1980s and has flared up multiple times since. Most recently, in 2017, the U.S. imposed a tariff of up to 24% on Canadian softwood lumber, claiming that Canada’s forestry practices give its companies an unfair advantage. Canada has contested this tariff at the World Trade Organization (WTO) and other international forums, but the dispute is ongoing.

3. U.S. Steel and Aluminum Tariffs (2018):

• In 2018, the Trump administration imposed 25% tariffs on steel and 10% tariffs on aluminum imports from various countries, including Canada, citing national security concerns. In response, Canada retaliated by imposing tariffs on $16.6 billion worth of U.S. goods, including products like steel, aluminum, ketchup, and whiskey.
• These tariffs were lifted in May 2019 after negotiations between the U.S. and Canada, but the initial imposition of tariffs caused significant tensions between the two nations.

4. Counter-Tariffs in Response to U.S. Section 301 Tariffs (2018):

• When the U.S. imposed tariffs on steel and aluminum, Canada imposed counter-tariffs on a wide range of U.S. goods, including products like bourbon, yogurt, ketchup, and motorcycles. This was part of Canada’s response to the Section 301 tariffs the U.S. imposed on steel and aluminum imports.

In summary, Canada has imposed tariffs primarily in response to U.S. actions, particularly on agricultural products like dairy and in long-running disputes over softwood lumber and trade protectionism. These tariffs are part of the broader complex relationship between the two countries in terms of trade and economic policy.

 

Canada has not imposed tariffs on U.S. oil imports, but the relationship between Canada and the U.S. regarding oil has been a significant and sometimes contentious issue, largely revolving around trade agreements, pipeline projects, and energy policies rather than tariffs.

Key Issues in U.S.-Canada Oil Trade:

1. Oil Exports to the U.S.:

• Canada is the largest foreign supplier of oil to the U.S., providing around 60-65% of U.S. crude oil imports. Much of this oil comes from Canada’s oil sands in Alberta.
• While Canada has not imposed tariffs on oil exports, the U.S. has historically benefited from this stable and inexpensive source of oil.

Pipeline Disputes:

• The Keystone XL Pipeline is one of the most notable projects tied to the U.S.-Canada oil relationship. Proposed in 2008, this pipeline was intended to transport oil from Alberta’s oil sands to refineries on the U.S. Gulf Coast. However, it became a political lightning rod in both Canada and the U.S., with environmental concerns leading to opposition.
• In 2015, the Obama administration rejected the project due to environmental reasons. However, under President Trump, approval was granted, but President Biden canceled the permit in 2021, further complicating the oil trade dynamics between the two countries. While this isn't about tariffs, it highlights how energy politics can impact trade relations.

Energy Dependence and U.S. Tariffs on Canadian Oil:

• While the U.S. imports large quantities of Canadian oil, there has been some political discussion over Canada’s energy dependence on the U.S.. In the past, U.S. lawmakers have proposed ideas like energy tariffs on Canadian oil or imposing penalties for Canada’s reliance on oil extraction methods like the oil sands, which have been criticized for their environmental impact.
• However, these ideas have never fully materialized into official tariffs, largely because of the deep integration of the two countries’ energy markets. Canada’s oil industry is heavily reliant on U.S. refineries, and both countries benefit from the cross-border energy trade.

Trade Agreements (NAFTA/USMCA):

• Both NAFTA (North American Free Trade Agreement) and its successor, the United States-Mexico-Canada Agreement (USMCA), have provisions that facilitate energy trade between the two nations. In particular, these agreements encourage the flow of Canadian oil to the U.S. and provide protections for energy investments.
• The USMCA (ratified in 2020) did not include specific new tariffs on Canadian oil but did ensure that energy trade continues largely unrestricted.

Environmental and Political Pressure:

• Although Canada has not imposed tariffs on U.S. oil, the environmental impact of oil sands extraction and the political pressure surrounding climate change have led to tensions. The U.S. has at times imposed regulations (like limiting investment in oil sands projects) in response to environmental concerns. These regulations, while not tariffs, have affected how U.S. companies engage with Canada's oil sector.

Price Differentials:

• Another issue that has occasionally arisen is the price differential between Canadian crude (particularly from the oil sands) and U.S. crude. At times, Canadian oil has sold at a significant discount due to infrastructure bottlenecks (such as the inability to transport enough oil from Alberta to U.S. refineries) or price fluctuations in global oil markets. These price issues affect both Canadian and U.S. energy markets but are not directly related to tariffs.

 

While Canada did not impose broad new tariffs on U.S. goods during Trump's first term, there were retaliatory tariffs due to U.S. actions, particularly the tariffs on steel and aluminum, as well as trade disputes in agriculture. The trade relationship was generally tense at times, but the USMCA agreement ultimately helped resolve some of these issues.

 

Word War III

 

Remember earlier when we spoke about how some historians believe the tariffs during the Great Depression set the stage for Word War II. History doesn’t repeat itself exactly, but it sure does rhyme. The protectionist tariffs and trade wars we’re seeing today—especially between the U.S. and China—echo the mistakes of the past. Just like the Smoot-Hawley Tariff worsened the Great Depression by strangling global trade, modern tariffs risk economic stagnation, supply chain disruptions, and retaliatory measures that harm both businesses and consumers.

 

Trade restrictions today are often justified as a way to protect domestic industries or national security, but they tend to escalate conflicts rather than resolve them. As nations turn inward and global cooperation erodes, the stage is set for heightened economic nationalism—historically a prelude to military confrontation. When economic ties weaken, diplomacy suffers, making war more likely as countries seek alternative ways to assert power.

 

There are striking parallels between the events leading up to World War II and today’s geopolitical landscape. Here are some key historical events and their modern echoes:

 

1. Economic Protectionism & Trade Wars

 

• Then (1930s): The Smoot-Hawley Tariff Act (1930) triggered a global trade war, worsening the Great Depression. Economic hardship fueled nationalism, extremism, and aggressive expansion as nations sought to secure resources.
• Now: The U.S.-China trade war, economic sanctions on Russia, and supply chain 
• disruptions are stoking economic tensions. Countries are adopting "friendshoring" and "reshoring" policies, weakening globalization.

 

2. Global Economic Crisis & Inflation

 

• Then: The Great Depression (1929-1939) devastated economies, leading to mass unemployment, political instability, and the rise of authoritarian leaders like Hitler and Mussolini.
• Now: Post-pandemic economic struggles, high inflation, and financial instability (such as the banking crises and national debt concerns) are shaking economies worldwide. Economic hardship often breeds radical political shifts.

 

3. Expansionist Authoritarian Regimes

 

• Then: Germany, Italy, and Japan pursued territorial expansion to secure resources and markets. Hitler’s invasion of Poland (1939) followed years of unchecked aggression.
• Now: Russia’s invasion of Ukraine (2022) mirrors Nazi Germany’s early moves, testing the resolve of Western nations. China's assertiveness over Taiwan resembles Japan’s pre-WWII expansionism.

 

4. Weak International Institutions & Diplomacy Failures

 

• Then: The League of Nations failed to stop aggression from Germany, Italy, and Japan due to appeasement policies and lack of enforcement.
• Now: The United Nations and NATO face criticism for failing to prevent conflicts like Ukraine or deter China’s ambitions in the Pacific.

 

5. Militarization & Arms Races

 

• Then: The 1930s saw massive military buildups by Germany and Japan, preparing for large-scale war.
• Now: The U.S., China, Russia, and other nations are increasing defense budgets. China’s naval expansion and Russia’s nuclear threats are escalating tensions.

 

6. Nationalism & Political Extremism

 

• Then: Fascist movements gained traction, blaming outsiders for economic woes. Hitler and Mussolini capitalized on nationalistic fervor.
• Now: Rising populism, nationalism, and polarization in many countries (U.S., Europe, India, China, Russia) resemble pre-WWII radicalization.

 

7. Resource Struggles & Energy Wars

 

• Then: Japan invaded Manchuria (1931) and later attacked the U.S. at Pearl Harbor (1941) due to energy sanctions cutting off oil supplies.
• Now: The energy crisis in Europe due to the Ukraine war, U.S.-China competition for rare earth metals, and Middle East tensions over oil all create flashpoints for conflict.
• Conclusion: Are We on a Similar Path?

 

These parallels are too strong to ignore. Economic instability, trade wars, weakened global institutions, militarization, and rising nationalism set dangerous conditions for a large-scale conflict. The key question is whether leaders will recognize these warning signs and take action to prevent another world war—or if they will stumble into it just like in the 1930s.

 

So, are we repeating history? In many ways, yes. Rising protectionism, economic instability, and geopolitical tensions all look eerily familiar. The question now is whether world leaders will recognize the warning signs and course-correct before history rhymes into another global conflict.