U.S. President Donald Trump has once again turned to tariffs to try to get his way with a U.S. trading partner.
This time, the target is Mexico: Trump plans to impose five per cent tariffs on Mexican imports starting June 10 and to ratchet them up to 25 per cent by Oct. 1 if the Mexicans don’t do more to stop the surge of Central American migrants across the southern U.S. border.
Tariffs have become one of Trump’s favourite policy tools. The president, who calls himself “a Tariff Man,” has slapped the levies on imported steel, aluminum, dishwashers and solar panels. He’s also imposed them on $250 billion worth of Chinese goods in a dispute over China’s aggressive campaign to challenge American technological dominance. And he’s planning to extend tariffs to the $300 billion worth of Chinese imports that he hasn’t already targeted.
Before Trump, tariffs had long been fading into history, a relic of the 19th and early 20th centuries when nations tended to focus on keeping imports out and exporting as much as they could.
More than any other modern president, Trump has embraced tariffs as a punitive tool — against Europe, Canada and other key trading partners but especially against China, the second-largest economy after the U.S.
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Here’s a look at what tariffs are and how they work.
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Q: IS THE U.S. IN A TRADE WAR?
Economists have no set definition of a trade war. But with the world’s two largest economies now slapping potentially punishing tariffs on each other, it looks as if a trade war has arrived. All told, Trump has threatened to hit as much as $550 billion worth of China’s exports to the U.S. with punitive tariffs. That’s more than the $506 billion in goods that China shipped to the United States last year.
It’s not uncommon for countries — even close allies — to fight over trade in specific products. The United States and Canada, for example, have squabbled for decades over softwood lumber.
But the U.S. and China are fighting over much broader issues, like China’s requirements that American companies share advanced technology to access China’s market, and the overall U.S. trade deficit with China. So far, neither side has shown any sign of bending.
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Q: SO WHAT ARE TARIFFS?
Tariffs are a tax on imports. They’re typically charged as a percentage of the transaction price that a buyer pays a foreign seller.
In the United States, tariffs — also called duties or levies — are collected by Customs and Border Protection agents at 328 ports of entry across the country. Proceeds go to the Treasury. The tariff rates are published by the U.S. International Trade Commission in the Harmonized Tariff Schedule, which lists U.S. tariffs on everything from dried plantains (1.4 per cent) to parachutes (three per cent).
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Sometimes, the U.S. will impose additional duties on foreign imports that it determines are being sold at unfairly low prices or are being supported by foreign government subsidies.
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Q: DO OTHER COUNTRIES HAVE HIGHER TARIFFS THAN THE UNITED STATES?
Most key U.S. trading partners do not have significantly higher average tariffs. According to an analysis by Greg Daco at Oxford Economics, U.S. tariffs on imported goods, adjusted for trade volumes, average 2.4 per cent, above Japan’s two per cent and just below the three per cent for the European Union and 3.1 per cent for Canada.
The comparable figures for Mexico and China are higher: Both have higher duties that top four per cent.
Trump has complained about the 270 per cent duty that Canada imposes on dairy products. But the United States has its own ultra-high tariffs — 168 per cent on peanuts and 350 per cent on tobacco.
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Q: WHAT ARE TARIFFS SUPPOSED TO ACCOMPLISH?
Two things: Raise government revenue and protect domestic industries from foreign competition. Before the establishment of the federal income tax in 1913, tariffs were a big money raiser for the U.S. government. From 1790 to 1860, for example, they produced 90 per cent of federal revenue, according to Clashing Over Commerce: A History of US Trade Policy by Douglas Irwin, an economist at Dartmouth College. By contrast, last year tariffs accounted for only about one per cent of federal revenue.
In the fiscal year that ended last Sept. 30, the U.S. government collected $34.6 billion in customs duties and fees. The White House Office of Management and Budget expects tariffs to fetch $40.4 billion this year.
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Tariffs also are meant to increase the price of imports or to punish foreign countries for committing unfair trade practices, like subsidizing their exporters and dumping their products at unfairly low prices. Tariffs discourage imports by making them more expensive. They also reduce competitive pressure on domestic competitors and can allow them to raise prices.
Tariffs fell out of favour as global trade expanded after World War II.
The formation of the World Trade Organization and the advent of trade deals like the North American Free Trade Agreement among the U.S., Mexico and Canada reduced tariffs or eliminated them altogether.
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Q: WHY ARE TARIFFS MAKING A COMEBACK?
After years of trade agreements that bound the countries of the world more closely and erased restrictions on trade, a populist backlash has grown against globalization. This was evident in Trump’s 2016 election and the British vote that year to leave the European Union — both surprise setbacks for the free-trade establishment.
Critics note that big corporations in rich countries exploited looser rules to move factories to China and other low-wage countries, then shipped goods back to their wealthy home countries while paying low tariffs or none at all. Since China joined the WTO in 2001, the United States has shed 3.1 million factory jobs, though many economists attribute much of that loss not just to trade but to robots and other technologies that replace human workers.
Trump campaigned on a pledge to rewrite trade agreements and crack down on China, Mexico and other countries. He blames what he calls their abusive trade policies for America’s persistent trade deficits — $566 billion last year. Most economists, by contrast, say the deficit simply reflects the reality that the United States spends more than it saves. By imposing tariffs, he is beginning to turn his hard-line campaign rhetoric into action.
WATCH: White House says Mexico has not done enough on migration
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Q: ARE TARIFFS A WISE POLICY?
Most economists — Trump’s trade adviser Peter Navarro is a notable exception — say no. The tariffs drive up the cost of imports. And by reducing competitive pressure, they give U.S. producers leeway to raise their prices, too. That’s good for those producers — but bad for almost everyone else.
Rising costs especially hurt consumers and companies that rely on imported components. Some U.S. companies that buy steel are complaining that Trump’s tariffs put them at a competitive disadvantage. Their foreign rivals can buy steel more cheaply and offer their products at lower prices.
More broadly, economists say trade restrictions make the economy less efficient. Facing less competition from abroad, domestic companies lose the incentive to increase efficiency or to focus on what they do best.