By David Pogue
December 8, 2024 / 9:26 AM EST / CBS News
Incoming President Donald Trump has made his feelings about tariffs very clear: “The word
‘tariff’ is the most beautiful word in the dictionary,” he has said. “I think it’s more beautiful than
‘love.’ … I love tariffs! … Music to my ears!”
And what exactly is a tariff? It is a tax. According to Dartmouth economics professor Doug Irwin,
“In the U.S. we’re basically talking about import tariffs, taxes on imported goods coming into the
U.S.”
Irwin says governments have all kinds of reasons for introducing tariffs: “Sometimes it’s to
reduce the trade deficit. Sometimes it’s to bring back jobs. Sometimes it’s to punish other
countries for their unfair trade practices. Sometimes it’s to raise revenue so that we can cut
income taxes.”
At its most fundamental, a tariff works like this:
Suppose we import a product from China. The price is $50. But before you can buy it, our
government adds $25 to the price. That’s the tariff. Your final price is $75. China gets its $50; the
extra $25 winds up going to the U.S. Treasury.
But who pays these tariffs?
According to Trump, it’s the other countries. “Trillions and trillions of dollars pouring into the
United States Treasury,” is his description of what happens. “China paid hundreds of billions of
dollars during my term.”
But as Irwin points out, that’s actually not the way tariffs work. “It’s very misleading to say that
that’s what’s going on. Of course, it’s the U.S. consumers that are paying those, not China itself.
China’ is not writing checks to the U.S. government.”
Tariffs have been part of international trade for many centuries. What we’ve learned from
history is that they often have unintended consequences. The US for example has a tariff on
sugar that has doubled the price of sugar. It has helped out sugar cane farmers in Louisiana and
Florida, but it’s also driven 34% of American chocolate manufacturing (and jobs) out of the
country.
Then, there was Trump’s 25% tariff on imported steel in 2018. US steelmakers thrived, but
companies that make things out of steel (like Ford, GM and Caterpillar) suffered dearly. Just ask
Ford’s then-CEO Jim Hackett, who in 2018 told Bloomberg, “The metals tariffs took about a
billion dollars of profit from us.”
Tariffs against one particular country can backfire. Irwin said, “With the China tariffs, we’re
importing a lot more from Vietnam and Malaysia. If the idea with the tariff was to bring jobs back
home, instead we’re just shifting them from across Asia.”
There’s also the retaliation problem. “When we imposed the steel tariffs, the European Union
and China got very upset with us,” Irwin said. “And what did they do? They raised tariffs on
American farm goods. So, all of a sudden, American farmers, who had nothing to do with steel
per se, found their sales limited overseas.”
Every recent president has favoured some tariffs. The Biden administration, for example,
maintained some of the tariffs from Trump’s first term, and imposed its own 100% tariff on
Chinese electric cars. These tariffs targeted particular categories of products.
Most recently, Trump has proposed double-digit tariffs on everything imported from Mexico,
Canada and China. They would raise the price we pay for things like fruit, lumber, electronics,
oil, medicine, metal and beef. Studies have calculated that those tariffs will cost 1% of all
American jobs (according to the Peterson Institute for International Economics); raise average
car prices by $3,000 (according to Wolfe Research); and cost every American household at least
$1,000 a year (according to Yale Budget Lab).
But Trump’s transition leader Howard Lutnick predicts that his boss won’t tax imported goods
for which there are no American-made alternatives. Back in September, Lutnick told CNBC,
“Tariffs are an amazing tool for the president to use. But he understands, don’t tariff stuff we
don’t make. If we don’t make it, and you want to buy it, I don’t want to put the price up.”
But maybe Trump has no intention of imposing the tariffs for real? Maybe he’s playing a strategic
game — tariffs as negotiating tactics? “Tariffs can be used as a threat and a bargaining chip,”
said Irwin. “And sometimes, if you’re really credible, just making the threat of a tariff is enough to
bring another country to change its policy in a way that you desire without your actually having
to impose the tariff in the end.”
In the end, when a government wants to achieve some economic or geopolitical goal, it can use
all kinds of different tools: subsidies, tax breaks or penalties, trade agreements, regulations,
certifications, investment incentives, and so on. Tariffs can be a powerful took but often they are not the best one.