INN@UT #5: Tariffs

1. What is a tariff? Who pays a tariff and which entity receives a tariff?

• tariff

  • A tariff is a tax imposed on a good when it crosses into US territory

  • Paid to the government by the importing customer (such as wholesaler) 

  • Generates revenue for the government Insulates domestic firms from international competition 

    • Raises costs of foreign-produced goods 

    • Allows domestic producers to raise their prices, to be on the same level as foreign goods

    • Allows noncompetitive domestic firms (with higher production costs) to remain in business

  • Tariffs enable governments (and politicians) to influence prices, rather than allowing prices to be set in competitive markets 

  • Deviation from competitive markets associated with capitalism 

    • Free trade (or absence of tariffs) mechanism to import market competition into domestic economy “

  • Protection for sale:” When governments enact tariffs, they are also selling regulations to domestic firms (often for political favors) for some political gain (e.g. campaign contribution) 

    • See this via exemptions (Apple in Trump 1.0)

      • The reason that Apple got exemptions for their iPhones that were manufactured in China was because of camapgain contributions

• a tariff is paid by

  • In most cases, importers will pass on some or all costs of the tariff to consumers 

  • Therefore, consumers pay higher prices Tariffs redistribute domestic income from consumers to globally noncompetitive domestic firms 

  • Important exception…large countries with monopsony purchasing power(single buyer in a market) 

    • Some foreign firms may reduce their (export) to offset the tariffs because they lack alternative consumers

• the entity that receives a tariff is

  • foreign countries that want to import goods to the US

2. What are the consequences of tariffs? In particular, make sure you understand how tariffs affect the following:  the revenue of the federal government, the costs of foreign-produced goods, and the economic behavior of domestic producers.

• the consequences of tariffs

  • They hurt consumers while protecting very specific Industries

  • Get countries to change the behavior 

  • Countries just don't accept tariffs without a reaction instead they frequently retaliate 

    • this means that exporters likely lose Market share and their prices increase in foreign markets 

    • so trying to hurt other countries Exporting to the United States but you can also hurt your own domestic companies trying to export abroad 

• they affect the revenue of the federal government,

  • create revenue for federal government

• the costs of foreign-produced goods

  • they raise prices on foreign produced goods

•  the economic behavior of domestic producers

  • The diminished Market competition from those foriegn producers then allows domestic manufacturers To change their prices and charge higher prices for their products

  • Studies have shown that you lose downstream jobs Industries as you gain in the Upstream industries that are being protected by the tariffs 

3. Who ultimately pays some or all the costs of tariffs? How does this affect domestic income distribution?

• the entity that ultimately pays some or all the costs of tariffs is the consumer

• this affects domestic income distribution by

  • Tariffs redistribute domestic income from consumers to globally noncompetitive domestic firms 

    • • Important exception...large countries with monopsony purchasing power – Some foreign firms may reduce their (export) to offset the tariffs because they lack alternative consumers

4. What is monopsony purchasing power and how does this impact the effects of tariffs?

•  monopsony purchasing power is

  •  refers to a situation where a single buyer controls a significant portion of a market, enabling them to influence the price of goods or services they purchase.

•  monopsony purchasing power  impacts the effects of tariffs by

  • a country with monopsony power can use a tariff to reduce its import demand, which can lower the price it pays for the imported good

5. How do tariffs allow governments and politicians to influence prices? How is this a deviation from competitive markets and capitalism?

•  tariffs allow governments and politicians to influence prices by

  • Tariffs enable governments (and politicians) to influence prices, rather than allowing prices to be set in competitive markets 

•  this a deviation from competitive markets and capitalism because

  • Deviation from competitive markets associated with capitalism 

    • Free trade (or absence of tariffs) mechanism to import market competition into domestic economy 

    • “Protection for sale:” When governments enact tariffs, they are also selling regulations to domestic firms (often for political favors) for some political gain (e.g. campaign contribution)

      •  See this via exemptions (Apple in Trump 1.0)

6. Using the example of tariffs on washing machines during the first Trump administration, explain how tariffs affect prices for imports and domestically produced products. What effect might this have on inflation and economic growth?

• in 2018 when President Trump put tariffs on washing machines 

  • saying it was going to benefit our consumers and we're going to create a lot of jobs 

  • then whenever a washing machine is imported to the US the company on the US side doing the importing pays a tariff to the US government  

  • Their margins are pretty low they've got to pass that price on to Consumers who ultimately pay it 

  • that's the whole point in some sense, to reduce demand for those goods and create space for domestic producers 

  • after the tariffs not only did the price of imported washing machines go up so did the ones made in the US 

  • There's this myth out there that if we tax Imports domestic producers won't change their prices and that's not the case 

  • you're creating more demand for them so naturally the price goes up and it wasn't just washers dryers went up in price too even though they weren't part of the Tarrifs 

  • these tariffs did create a lot of jobs and the US was getting 82 mil annually from domestic companies importing them however it cost consumers 1.5 billion more annually

• tariffs On the steel had aluminum 

  • those are really designed to punish China for its transgressions of international trade rules 

  • also for National Security those materials are used to make a lot of military equipment but also every day things like cars 

  • all the industries still in have to pay the higher price that squeezes their profit margins and also puts them at a competitive disadvantage against foreign producers of the same Goods who don't have to pay those inflated costs for their inputs 

  • and so a lot of Studies have shown that you lose jobs in downstream Industries as you gain in the Upstream industries that are being protected by the tariffs 

• tariffs affect prices for imports and domestically produced products, such as when  during the first Trump administration  tariffs on washing machines this is because 

• This might effect inflation and economic growth because

7. Describe how the roll out of tariffs since the beginning of the second Trump administration changed over time. How did these changes produce uncertainty in the economy?

• The rollout of tariffs since the beginning of the second Trump administration has changed over time because

  • January 20, 2025:  America First Trade Policy Memorandum 

  • January 26/27:  Tariff threats to Colombia on deportation flights 

  • February 1:  announce 25% tariffs on Canada and Mexico, 10% tariff on Canadian energy, additional 10% on imports from China 

  • February 3:  Trump Admin pauses these tariffs 

  • February 4:  Trump Admin implements the China tariffs 

    • China immediately retaliates with tariffs on agricultural imports (These tariffs were designed to hurt members of Trump's constituency Namely agricultural sectors and farmers )

  • Feb 26, threatens 25% tariffs on EU bloc 

  • Mar 3:  implementation of Canada and Mexico tariffs Canadian PM announces retaliatory tariffs, Ontario Premier threatens cut off electricity to MN, NY, and MI 

  • Mar 6:  Trump adjusts Canada and Mexico tariffs, exempting goods covered by US-Can-Mex agreement 

    • To provide relief for the tightly integrated supply chain for automobiles and automobile parts 

  • Mar 12:  raises tariffs on steel and aluminum from 10% to 25% 

  • Mar 23:  Trump and advisors suggest flexibility on tariffs, also focus on reciprocal tariffs 

  • March 24:  25% tariff on consumers of Venezuelan oil 

  • March 26:  25% tariff on imported cars and car parts

•  these changes produce uncertainty in the economy because

  • Economists are worried that  tariffs will worsen inflation and lead the us into a recession

• if president Trump institutes a reciprocal trade policy he essentially lets other countries set the Tariff policy of the United States because then the United States must then match the tariffs of other states 

  • this doesn't make much sense relative to Prior conversations about this Trump's Grand strategy goals that emphasize strengthening of American sovereignty 

  • Okay second notice the contradictions in Steven Miller's justification for these reciprocal tariffs he says the US Auto industry is getting hammered by trade policies of other countries and yet the US Auto industry wants the exact opposite outcome here they opposed these new Tariffs on automobiles because these tariffs will upend their cost structures that depend tightly on integrated Supply chains in North America 

  • side note the potential International political and economic consequences of these tariffs might cause the rest of the world to just decide to reorient their trade profiles away from the United States

    •  for example Canada and Mexico might opt just to trade more with Europe and Asian country and this could have the effect of increasing the isolation of the US economy 

  • and forth economists are also worried about inflationary effects of tariffs inflation could increase the risk of a recession that contributes to significant job losses and a declining income 

  • This policy arguably first and foremost seeks to Increase domestic manufacturing jobs but if it Sparks a recession there could be a significant loss in jobs 

  • As prices go up less is consumed And the market is going to slow down 

 inflation indicates increasing price levels

• Higher rates of inflation tend to erode the real income of people as growing costs of everyday item reduces their Purchasing power and their ability to save and invest 

• The financial sector banks in particular also hate inflation because it erodes the value of their Investments 

  • as prices of everything goes up your investment will still be the same amount of money as before so it will have less power/worth when everything is up

• The Federal Reserve raised interest rates during the Biden Administration to try and slow economic activity to control and limit inflation 

  • This policy has been working but slowly 

• Economics are expecting that tariffs will increase  prices which risks reigniting High inflation 

Monetary policy influences the structure of interest rates in the United States or The cost of borrowing. and the cost of borrowing then influences the rate of new Investments and economic growth in general

• So the Federal Reserve is watching how these new tariffs are going to influence inflation so that they can then establish monetary policy 

federal reserve chairman

• He dances around it but basically is saying that the tariffs are causing inflation 

• Whether the Effect of tariffs are short or long lived effects and influences monetary policy response 

  • If they are short-lived that would suggest that the Federal Reserve does not need to  raise interest rates 

  • If they expect the effects to be longer terms or if they feel the people Are have expectations of high inflation 

    • Because when expectations go up it sort of becomes a self-fulfilling prophecy 

• Slow down domestic economy, economic activity slow down consumption 

• If they raise car prices for example if they make it harder to buy houses ,they slow down domestic economic activity and 

• then they trigger a recession but if that recession is coupled with inflation we can't use Monetary policy to get out of the recession r

• normally the in during covid the monetary policy response that was really important for getting us out of the recession was to cut interest rates 

• but now if tariffs cause inflation they might be removing that tool from the toolkit and we enter into this dreaded condition of stagflation 

•  stagnation: combination of a recession or slow economic growth or zero economic growth or negative economic growth and inflation at the same time

8. Why is the Trump administration imposing tariffs? What are the primary goals that President Trump is trying to accomplish?

• Ideological component associated with economic nationalism 

  • • Relocate manufacturing to US 

  • • Extract political concessions from other countries

  • • Tariffs as means to generate public revenues 

  • • Domestic political benefits (selling exemptions) 

  • • National security benefits...reduce dependence on global supply chains