My Tariff Is Bigger Than Yours

I know what you are thinking! Stop it.

Let’s talk for a few moments about tariffs. Tariffs are not a new thing and have been around since people invented government and government invented taxes. Just jog your memory back to 7th grade US History to remember that tariffs helped to establish our country. Between the years of 1760 and 1775, the British Parliament passed a number of laws that taxed goods, commerce and trade going into and out of the American colonies. The Townshend Acts, in particular, were measures passed by the British in 1767 that taxed British goods imported to the American colonies. Those pesky colonists, however, claimed that because they had no representatives in Parliament, the Acts were an abuse of power, and threw around the phrase “no taxation without representation.”. The British response to the colonists’ discontent was to send troops to the colonies to enforce the tariff laws. The British King underestimated both the height of his own arrogance and the depth of the obstinacy of the American colonists, and instead of meekly accepting the authority of the mighty British crown, the colonists chose to retaliate. On December 16, 1773, a surreptitious resistance group of colonists known as The Sons of Liberty dressed as Indians, rowed out to several ships owned by the British East India Company and dumped 342 chests of tea into the chilly waters of Boston Harbor. The “Boston Tea Party” was the first in a series of defiant acts to British rule that rallied American patriots in all 13 colonies to fight for independence.

The British, in addition to the taxes on tea, had also imposed tariffs on sugar, molasses (used primarily for rum), stamps, paper (required for letters, documents, signs and you name it) and, as an aggravating cherry on top created the Quartering Act in 1765 that required colonial authorities to provide food, drink, quarters, fuel and transportation to British forces stationed to enforce the tariffs in their towns and villages. The Colonists were not amused.

The beginning of all this brouhaha was the French and Indian War that ended in 1763. The British had defended the colonies from the attempted French expansion in North America at great cost to the Crown but at little expense to the colonies. The colonists, for example, paid about 1/20th the taxes of British subjects living in England, and the British Parliament was determined - not without cause - to require the colonies to pay back at least part of the money spent in their defense. This is where the Townshend Acts originated, and the British added duties (taxes) on British china dinnerware, paint, paper, tea and other items imported from Britain to the colonies. The British chose these items because they were convinced the colonists would have a difficult time, given the colonies lack of industry and almost no large-scale production capabilities, producing those items in sufficient quantities on their own. Parliament also thought the tariffs would raise enough additional money to pay the salaries of colonial governors and judges and ensure the loyalty of government officials to the British Crown. All this led Ben Franklin to tell the British the colonies would make their own goods or do without, and to widespread boycotts of British goods in the colonies. We all know how this story turned out.

So what, exactly, is a tariff and why do countries employ them? A tariff is a tax imposed on goods and/or services imported from one country to another. The purpose of a tariff, like almost every other tax you might think of, is primarily financial, but don’t count out the aspects of influence or competitive advantage of one country over another. Tariffs are most often used when one government disagrees with another governmental trading partner. Since most countries are limited by their natural resources available and by their ability to produce goods or services or both, they trade with other countries to get whatever goods or services their population needs, wants or both. Reasons behind the recent use of tariffs include many you have heard before, like the reinstatement of jobs lost to foreign countries, the “you impose tariffs on stuff we send you and we will put them right back on the stuff you send us” idea, and attempts to lower or eliminate the trade deficit. One that is not often mentioned is an effort to slow or eliminate the theft of intellectual property by China. In addition to outright piracy and counterfeiting, China often uses cyber theft to gather valuable trade secrets, methodology and technology transfers, and often make access to that information a requirement for any American and other foreign company as a condition of doing business in China, so in effect what China can’t steal it coerces as a condition of access to its markets.

There are, without splitting too many hairs, two types of tariffs: specific and ad valorem. Specific tariffs are those levied as a fixed fee on a given product or item, such as a $200 tariff on a car or a laptop computer. An ad valorem tariff is imposed based on an item’s value, as in a 10% tariff on the import’s cost. The Tariff Act of 1789 was passed by the first US Congress to promote trade and to raise revenue for the US government. Supported by Alexander Hamilton, the Act was designed to protect American manufacturing from foreign competition, and, in the days before the income tax, in some years provided as much as 95% of the government’s revenue.

The adoption of the income tax in 1913, along with the Industrial Revolution of the late 1800’s, ensured the tariff was no longer needed to fund the government and US industries at that time didn’t need the protection from foreign competition provided by tariffs. The Great Depression soon changed the economic dynamics, and President Hoover used the Smoot-Hawley Tariff Act of 1930 to impose a 20% tariff on imports to protect US farmers and began a trade war with Europe. That economic downturn did not turn out well for the Europeans in the short term and for the rest of the world soon after.

World nations today employ what’s known as the HTS - the “Harmonized Tariff Schedule.” In spite of the name, it doesn’t sing or play guitar but is an agreed upon list of over 17,000 different kinds of goods and a specific numbered code assigned to each. If you are like me, the most amazing thing about the HTS is that every country has already agreed upon anything at all, much less the nomenclature for over 17,000 items. Most goods on the HTS list do not have a tariff attached to them, but many countries pick specific items or products to add to their country’s list of imports that are taxed. China, for example, is currently imposing 15% tariffs on imports of liquid natural gas and coal, and 10% on oil, many farm equipment items and some automobiles from the US. The US is imposing tariffs on Mexico, Canada, the European Union and China on agricultural products, household appliances, US steel products, aluminum products, sports equipment and cast products going to those countries and on many products coming from them.

US exports to Canada in 2024 totaled $348.41 Billion according to the United Nations COMTRADE database on international trade. US imports from Canada during 2024 totaled $421.21 Billion according to the same source. US exports to Mexico, our second largest market after Canada, totaled $334.04 Billion. Total US imports from Mexico in the same year were $509.96 Billion. The top imports were delivery trucks, cars, motor vehicle parts and accessories, computers and crude petroleum. The US exports to China in 2024 were $143.55 Billion, and the total US imports from China totaled $462.62 Billion. We’re talking serious money here for all sides. That means that our country imported $1,393.79 Billion in goods from our top 3 trading partners and exported $826 Billion to them in 2024. You can see the trade deficit ($567.79 Billion) for yourself.

Without tariffs on some goods, American industries would operate at a financial disadvantage to countries that can produce, thanks to lower wages and child labor and even slave labor, some items significantly cheaper than our country. The advantage America has is that our total economy is both gigantic and diverse and doesn’t rely on trade to the same degree as other countries. The revenue raised by tariffs can help to offset the negative effects of that trade deficit, and can inflict, if needed, significantly more consequential economic damage to other countries than their tariffs negatively affect our economy.

So exactly what is the end game with tariffs, rumors of tariffs, threats of tariffs and reciprocal tariffs? What does the US hope to accomplish through this process? Simply put, the US tariff threats are attempts to force other countries - particularly China, Mexico and Canada - to reduce the number of illegal immigrants from each country and to help reduce the amount of fentanyl entering the US. The possibility of tariffs on imports from those countries will increase the prices US consumers pay for those goods, reducing demand and, as a result, hurt the exporting countries’ economies. It seems to be working already, in that Mexico and Canada have already agreed to expand border patrols to both lessen the number of illegal immigrants and the influx of fentanyl. The key proviso here is that the US, once the effectiveness of the additional border security both north and south has been shown, has already agreed to reduce or end many of the threatened tariffs to those countries.

Another key consideration is that of moving manufacturing back to the US that in past years had been moved to other countries. Many of the moves by companies and industries were to escape higher wage costs, higher tax rates and federal regulatory intrusion that dramatically increased the costs of production and sales of many products. In a speech to the World Economic Forum President Trump sent a clear and straightforward message to other countries of the world: “Come make your product in America and we will give you among the lowest taxes of any nation on earth. If you don’t make your product in America, which is your prerogative, then very simply you will have to pay a tariff.” Simple, straightforward and to the point. So far Johnson & Johnson, Softbank, United Arab Emirates, Apple, Nvidia, Taiwan Semiconductor, Oracle, Hyundai and others have pledged to invest hundreds of billions of dollars in the US, especially in the field of AI. Jensen Huang, CEO of Nvidia stated “Having the support of an administration that cares about the success of this industry and not allowing energy to be an obstacle is a phenomenal result for AI in the US.” Evidently that sentiment goes for many other foreign businesses also, and Honda, Stellantis, Prepac Manufacturing and Eli Lilly Pharmaceuticals have recently been added to the list. President Trump is evidently following the advice of President Theodore Roosevelt: “Speak softly but carry a big stick.” It would appear, at least in this case, the big stick he has chosen is shaped like a tariff.