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Tariffs: What they are and how they will work

With the world's two largest economies slapping tariffs on each other, it looks as if a trade war has arrived.

Tariffs

The United States and China have imposed tens of billions of dollars in tariffs on each other's goods.

US President Donald Trump has proposed slapping duties on, all told, up to $550bn worth of Chinese imports if China keeps retaliating and doesn't cave in to US demands to scale back its aggressive industrial policies.

Until the past couple of years, tariffs had been losing favour as a tool of national trade policy. They were largely a relic of 19th and early 20th centuries that most experts viewed as mutually harmful to all nations involved.

But Trump has restored tariffs to a prominent place in his self-described America First approach.

Trump enraged US allies including Canada, Mexico and the European Union this spring by slapping tariffs on their steel and aluminium exports to the US. The tariffs have been in place on most other countries since March.

The president has also asked the US Commerce Department to look into imposing tariffs on imported cars, trucks and auto parts, arguing that they pose a threat to US national security.

Here is a look at what tariffs are, how they work, how they've been used in the past and what to expect now:

Is this 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 $550bn worth of China's exports to the US with punitive tariffs. That's more than the $506bn in goods that China shipped to the US last year.


READ MORE: Trade war begins as China strikes back against US over tariffs


It's not uncommon for countries - even close allies - to fight over trade in specific products. The US and Canada, for example, have squabbled for decades over softwood lumber.

But the US and China are fighting over much broader issues, like China's requirements that US companies share advanced technology to access China's market, and the overall US trade deficit with China.

So far, neither side has shown any sign of bending.

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 US, 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 US International Trade Commission in the Harmonized Tariff Schedule, which lists US tariffs on everything from dried plantains (1.4 percent) to parachutes (3 percent).

Sometimes, the US 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.

Which country has the highest tariffs?

According to an analysis by Greg Daco at Oxford Economics, US tariffs on imported goods, adjusted for trade volumes, average 2.4 percent, above Japan's 2 percent and just below the 3 percent for the European Union and 3.1 percent for Canada.

The comparable figures for Mexico and China are higher: Both have higher duties that top 4 percent.

Trump has complained about the 270 percent duty that Canada imposes on dairy products. But the US has its own ultra-high tariffs - 168 percent on peanuts and 350 percent on tobacco.

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 maker for the US government. From 1790 to 1860, for example, they produced 90 percent 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 1 percent of federal revenue.

In the fiscal year that ended last September 30, the US government collected $34.6bn in customs duties and fees. The White House Office of Management and Budget expects tariffs to fetch $40.4bn this year.

Tariffs also are meant to increase the price of imports or to punish foreign countries for unfair trade practices, like subsidising 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 US, Mexico and Canada reduced tariffs or eliminated them altogether.

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 globalisation.

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 US 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 the US' persistent trade deficits - $566bn last year. Most economists, by contrast, say the deficit simply reflects the reality that the US spends more than it saves. By imposing tariffs, he is beginning to turn his hardline campaign rhetoric into action.

Are tariffs a wise policy?

Most economists - Trump's trade adviser Peter Navarro is a notable exception - say no. Tariffs drive up the cost of imports, and, by reducing competitive pressure, they give 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 US 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.


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