ECON 101
Tariffs 101: Basic Ideas, promises and reality By Robert Eyler
D onald Trump’s election victory across our country and the world. One key platform promise Trump made is that new and rising tariffs are coming as motivation for policy change in other countries (Canada, Mexico and China were initial targets by the end of November 2024). Some months ago, I wrote about international economic sanctions. Such political economy choices to curb economic activity with a problematic country or government (our general sanctions against Russia since late February 2022 are oft-cited brings uncertainty about how economic policies may change
in paying for government services). The federal government's tax revenue change is based on the market’s response to the tax and the cost of monitoring the tax collections. The optimistic promise of tariffs (what makes them politically alluring) is that as foreign sellers exit markets when taxed, the remaining market will be filled by American businesses that hire more workers. The government will gain revenue net of collection costs. The less optimistic look at tariffs is that as the redistribution of production takes place, domestic businesses hire few to no more employees, consumer prices rise without any real
examples) are related to tariffs. It is essential to see tariffs through two lenses to understand what may be coming from such import taxes. First, a tariff is a tax on specific imported goods to ostensibly protect domestic employers from import competition and redistribute market share by increasing import (and thus market) prices. It works like a sales tax, where the consumer of the taxed good pays a higher overall cost. Tariffs can be assessed on weight, price, quantity of units sold, other factors or a mix. In all cases, there is upward pressure on the final consumer cost. Consumers and producers share the tax “burden” based on how responsive the market taxes may be at current prices. If demand for the good or service taxed continues at a similar level regardless of price, consumers have more burden (pay more of the tax) than foreign producers. If consumers reduce their purchases when the cost increases quickly, the foreign producer will lower their price to remain competitive and bear more tax, but the consumer cost will still rise in net. Because of how economics works, the tariff’s cost is passed on like a sales tax regardless of whether the seller or buyer carries the burden of the tax’s effects on the market. Second, once the tariff is increased or newly assessed, the taxing government can generate more or augmented revenue (this is also a promise of tariffs, where domestic consumers that pay the tax’s cost get some of it back
change in manufacturing or services from businesses in the American economy, and the federal government makes very little additional revenue because of consumer pullback. Imagine Amazon having fewer goods for sale because some Canadian, Mexican or Chinese firms decide not to sell on Amazon now that they face a new or rising tariff. What would stop prices from rising among the remaining sellers? Would you lower prices if you sold goods on Amazon and did not have to compete as much over price? Tariff imposition or augmentation in general versus specific ways means three things fundamentally: (1) more pressure on consumer and retailer prices to rise/less breadth of goods available in those markets; and (2) reciprocal tariffs against American exporters as a political tactic to find a middle ground; and (3) small businesses and lower- income households are hurt more by general tariffs because such tariffs are a regressive tax. In both outcomes, recent reductions in American inflation likely stagnate or reverse while new or augmented tariffs are in effect; it all depends on the actual, new environment after Jan. 20, 2025. g
Dr. Robert Eyler is professor of economics at Sonoma State University and president of Economic Forensics and Analytics in Sonoma County.
January 2025
NorthBaybiz 53
Made with FlippingBook - Online magazine maker