WHY TRUMP’S TARIFFS WILL NOT WORK: A comprehensive study on the most important presidential economic measure in recent years

ALEXANDER HORTENSIO CORTEZ

WHY TRUMP’S TARIFFS WILL NOT WORK

A comprehensive study on the most important presidential economic measure in recent years

INDEX

1. Understanding Tariffs: Definition, Types, and How They Work

2. Why Trump’s tariffs will not work

3. Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits

4. Annex I to the executive order (list of countries and tariffs)

5. Annex II to the executive order (list of products)

6. Changes to Harmonized Tariff Schedule of the United States (HTSUS)

1. Understanding Tariffs: Definition, Types, and How They Work

Tariffs are a fundamental aspect of international trade and economic policy. They are taxes or duties imposed on goods and services imported from foreign countries. Tariffs serve various purposes, including protecting domestic industries, generating revenue, and influencing trade balances. This article delves into the definition of tariffs, their types, how they work, and their impact on global trade.

Definition of Tariffs

A tariff is a tax levied on goods when they are moved across international borders. The primary goal of a tariff is to raise the price of imported goods, making them less competitive compared to domestically produced goods. This can protect local industries from foreign competition and encourage domestic production. Tariffs can be imposed on a wide range of products, from raw materials to finished goods, and can vary significantly in their structure and application.

Types of Tariffs

Tariffs can be categorized into several types based on their structure and purpose. The most common types include:

Ad Valorem Tariffs:

Definition: These tariffs are calculated as a percentage of the value of the imported goods.

Example: If a country imposes a 10% ad valorem tariff on imported cars, a car valued at $20,000 would incur a $2,000 tariff.

Advantages: Easy to calculate and adjust based on the value of the goods.

Disadvantages: Can be less predictable for importers, as the tariff amount varies with the value of the goods.

Specific Tariffs:

Definition: These tariffs are fixed amounts per unit of the imported good, regardless of its value.

Example: A specific tariff of $500 per car would apply to every car imported, regardless of its price.

Advantages: Predictable and straightforward for importers.

Disadvantages: Can be less flexible and may not adjust well to changes in the value of the goods.

Compound Tariffs:

Definition: These tariffs combine elements of both ad valorem and specific tariffs.

Example: A compound tariff might consist of a 5% ad valorem tariff plus a $100 specific tariff per unit.

Advantages: Can provide a more nuanced approach to tariffing.

Disadvantages: More complex to calculate and administer.

Anti-Dumping Tariffs:

Definition: These tariffs are imposed to counteract unfair pricing practices by foreign companies, such as selling goods below their normal value.

Example: If a foreign company sells steel at a price lower than its production cost, the importing country might impose an anti-dumping tariff to level the playing field.

Advantages: Protects domestic industries from unfair competition.

Disadvantages: Can lead to trade disputes and retaliation from other countries.

Safeguard Tariffs:

Definition: These tariffs are temporary measures imposed to protect domestic industries from a sudden surge in imports.

Example: If a country experiences a sudden influx of cheap textiles, it might impose a safeguard tariff to give domestic textile producers time to adjust.

Advantages: Provides temporary relief to domestic industries.

Disadvantages: Can be seen as protectionist and may lead to trade disputes.

How Tariffs Work

The process of imposing and collecting tariffs involves several steps:

Legislation and Policy:

Governments determine the need for tariffs based on economic, political, and social factors.

Tariffs are often included in trade agreements and are subject to negotiation between countries.

Classification and Valuation:

Imported goods are classified according to a standardized system, such as the Harmonized System (HS) code.

The value of the goods is determined, which is crucial for calculating ad valorem tariffs.

Tariff Collection:

Customs authorities collect tariffs at the point of entry, typically at ports, airports, or border crossings.

Importers are responsible for paying the tariffs, which can be a significant cost, especially for high-value goods.

Impact on Prices:

The tariff increases the cost of imported goods, making them more expensive for consumers.

This can lead to a shift in demand towards domestically produced goods, which are not subject to the tariff.

Economic and Trade Effects:

Tariffs can have both positive and negative effects on the economy.

Positive effects include protecting domestic industries, generating revenue, and encouraging domestic production.

Negative effects include higher prices for consumers, potential retaliation from other countries, and reduced competition, which can lead to inefficiencies in domestic markets.

Economic Impact of Tariffs

The economic impact of tariffs is multifaceted and can affect various stakeholders differently. Here are some key economic considerations:

Domestic Producers:

Benefits: Tariffs can protect domestic producers from foreign competition, allowing them to maintain or increase market share. This can lead to higher profits, job creation, and investment in domestic industries.

Challenges: Domestic producers may become less competitive over time if they rely too heavily on tariff protection, leading to inefficiencies and reduced innovation.

Consumers:

Benefits: In some cases, tariffs can lead to the development of a more robust domestic industry, which can eventually result in lower prices for consumers.

Challenges: Immediate effects often include higher prices for imported goods, reducing consumer purchasing power. Consumers may also face limited choices if foreign competitors are driven out of the market.

Government Revenue:

Benefits: Tariffs generate revenue for the government, which can be used for public services, infrastructure, and other economic initiatives.

Challenges: High tariffs can discourage trade, leading to lower overall economic activity and potentially reducing government revenue from other sources, such as income taxes.

International Trade:

Benefits: Tariffs can be used as a negotiating tool in international trade agreements, helping to secure better terms for domestic industries.

Challenges: Tariffs can provoke retaliation from other countries, leading to trade wars and reduced global trade. This can have negative consequences for both the imposing country and the global economy.

Examples of Tariffs in Action

To better understand how tariffs work in practice, let's examine a few real-world examples:

U.S. Steel Tariffs:

In 2018, the United States imposed tariffs on steel and aluminum imports from several countries, including China, Canada, and the European Union. The tariffs were justified as a means to protect national security and support domestic steel and aluminum producers.

Impact: The tariffs led to higher prices for steel and aluminum in the U.S., affecting industries that rely on these materials, such as automotive and construction. They also sparked retaliation from affected countries, leading to increased tariffs on U.S. goods.

EU Agricultural Tariffs:

The European Union imposes tariffs on a wide range of agricultural products to protect its farmers from global competition. These tariffs are often part of the EU's Common Agricultural Policy (CAP).

Impact: The tariffs help maintain the viability of European farms but can lead to higher food prices for EU consumers. They also limit access to the EU market for agricultural producers in other countries.

China's Tariffs on U.S. Goods:

In response to U.S. tariffs on Chinese goods, China imposed retaliatory tariffs on a range of U.S. products, including soybeans, automobiles, and consumer electronics.

Impact: The tariffs disrupted global supply chains and led to economic uncertainty. U.S. farmers, in particular, faced significant challenges due to reduced access to the Chinese market.

Tariffs and Trade Agreements

Tariffs are often a central issue in international trade negotiations. Trade agreements aim to reduce or eliminate tariffs to promote free trade and economic cooperation. Some key aspects of tariffs in trade agreements include:

Tariff Reduction:

Trade agreements often include provisions for gradual reduction or elimination of tariffs on specific goods. This can be done through tariff schedules, which outline the timeline and extent of tariff reductions.

Tariff Preferences:

Trade agreements may grant preferential tariff treatment to certain countries or regions. For example, the African Growth and Opportunity Act (AGOA) provides duty-free access to the U.S. market for certain African countries.

Rules of Origin:

Trade agreements often include rules of origin, which determine the country of origin for a product. These rules are crucial for applying tariffs and ensuring that goods qualify for preferential treatment under the agreement.

Dispute Resolution:

Trade agreements typically include mechanisms for resolving disputes related to tariffs. These mechanisms help ensure that tariffs are applied fairly and in accordance with the terms of the