Tariff War Primer: A Review of Recent Tariff Policies and Their Impacts
As tariff policies evolve rapidly, financial leaders urgently need to adjust their strategies. This article reviews the Trump administration's tariff imposition on multiple countries since February 1, and interviews Alex Durante, a senior economist at the Tax Foundation, to analyze the differences between tariffs and taxes, the definition of trade wars, historical precedents, and the legal basis for current policies, while looking ahead to potential universal tariffs and protectionist trends.
The rapid evolution of tariff policies has forced many financial leaders to adjust their strategies quickly to adapt to a new macroeconomic landscape. From U.S. President Donald Trump's announcement of initial tariffs on China, Mexico, and Canada on February 1, to the subsequent retaliatory measures and expanded reciprocal tariffs, each step will ultimately affect pricing decisions, supply chains, exchange rates, and the bottom lines of many companies.
The Tax Foundation, a Washington, D.C.-based think tank that advocates for tax policies that promote economic growth, believes tariffs have "significant drawbacks" and asserts that they "lead to job losses and reduce long-term economic output." In a recent report, the Foundation stated: "We estimate that tariffs on Canada and Mexico would reduce long-term GDP by 0.3%, tariffs on China by 0.1%, and expanded steel and aluminum tariffs by less than 0.05%, and these estimates do not account for foreign retaliation."
As rhetoric intensifies, CFO Dive believes it is necessary to return to basic concepts and clarify the terms that are currently appearing frequently. In the following interview, Alex Durante, senior economist at the Tax Foundation, shares his insights on the fundamentals of tariffs and the historical context behind Trump's current trade war.
The following Q&A has been edited for clarity and brevity.
CFO Dive: What is a trade war?
Alex Durante: For a trade war to occur (which is a term we use), there really needs to be an escalation. One country imposes tariffs, another retaliates, and then the country that imposed the tariffs may consider further countermeasures in response to the retaliation. This creates a tit-for-tat policy that evolves into a trade war. If there is no form of retaliation, then I don't think it can be called a trade war.
CFO Dive: When and why did this recent trade war begin?
Alex Durante: I think it's fair to say the trade war began on February 1, when Trump announced tariffs, because the leaders of Canada and Mexico immediately indicated they would take countermeasures. We essentially went from having almost no barriers with Canada and Mexico to announcing tariffs on all their goods. Then... we announced another round of steel and aluminum tariffs on countries that had previously negotiated exemptions.
CFO Dive: What is the difference between tariffs and taxes?
Alex Durante: All tariffs are taxes, although obviously not all taxes are tariffs: the difference is that tariffs are taxes imposed on imported goods. Tariffs are paid by importers, and the revenue goes to the treasury. Compared to other domestic taxes, the only real difference is that tariffs affect exchange rates because they affect cross-border capital flows. A tariff is a type of sales tax, but it can have significant impacts on business in terms of production decisions. Additionally, we typically levy taxes for two reasons: one is the need to raise revenue, but there is another reason, known as a Pigouvian tax.
CFO Dive: What is a Pigouvian tax?
Alex Durante: Arthur Pigou was a 20th-century economist who proposed using taxes to discourage certain behaviors. Therefore, a tax on cigarettes is a Pigouvian tax, and tariffs operate in a similar way. We impose cigarette taxes not to raise revenue, although they do generate revenue, but the real purpose is to discourage people from smoking, right? The idea is to increase the cost of smoking so that people buy less, thereby bringing public health benefits. Tariffs follow similar logic.
CFO Dive: What is unique about this trade war?
Alex Durante: Actually, the past seven years have been a huge deviation from normal trade relations, because our last major trade war was during the Great Depression in the 1930s. You can trace back to the 1980s, when President Reagan imposed quotas due to concerns about Japanese imports. President Bush imposed steel tariffs in the early 2000s... So when presidents (recently) took such measures, they tended to be very limited in scope. These measures brought economic costs, but the impact was more concentrated. Before 2018, our average tariff rate was probably only 1% or 2%... Overall, what we've seen in the past seven years is unprecedented because the scope of tariffs during the first Trump administration certainly cannot compare to now.
CFO Dive: So, do you have to go back to the 1930s to see such broad tariff measures?
Alex Durante: Following the Smoot-Hawley Tariff (officially the Tariff Act of 1930), this is the second broadest tariff action we've seen in recent memory. The Smoot-Hawley Tariff was extremely broad, covering nearly all industrial and agricultural products, and raised the average tariff rate to nearly 50%, so it was quite high. At that time, many policymakers within the government saw prices falling, and they knew falling prices were bad, but they didn't realize that falling prices were a result of the recession rather than the cause. They thought that if they protected domestic producers from foreign competition, they could raise prices and revive the economy. But the actual result was the opposite: tariffs actually deepened the recession because consumers faced higher prices, had to reduce consumption, and the economy contracted further.
CFO Dive: Today's situation is different; prices are high due to inflation, not falling. So what is the rationale (for imposing tariffs)?
Alex Durante: The rationale is somewhat muddled because the administration has cited different reasons, and there are several different arguments. But under the Trade Act of 1974, the president's (authority to impose tariffs) is quite broad, and that's how Congress designed it. There are basically three main provisions: Section 232 covers national security reasons; Section 201 covers threats of injury to a domestic industry; Section 301 is the provision we used with China, essentially stating that if a foreign country engages in discriminatory practices that threaten the U.S., the president can impose tariffs.
CFO Dive: Looking ahead, what other expectations do you have for tariffs?
Alex Durante: I think the possibility of some kind of universal tariff is becoming increasingly likely.
CFO Dive: Are we entering a new era of protectionism? Do you think this is the end of globalism?
Alex Durante: Unfortunately, I think that's exactly what we're seeing, at least in the United States. Look, even President Biden didn't remove Trump's tariffs; in fact, he added his own new tariffs. Over the past decade, we've seen strong backlash against global trade (or globalism, as you call it). Over the past decade, we've seen this push toward more nationalist, more protectionist policies, and it doesn't seem like there will be any retreat at the moment. But when consumers feel the impact, we might see a backlash and a move in the other direction—toward more positive free trade... a trend of returning to some form of neoliberalism.