By: Alison Booth

Edited by: Eleanor Bergstein and Faith Magiera

A government exists, in part, to protect its people. Tariffs are a central tool of protection in terms of the domestic producers in the economy. Generally, tariffs tax imports to drive up the price of internationally produced goods. In turn, the domestically produced goods become more affordable to the domestic consumer. [1]

While the primary goal of tariffs is to generate revenue for the government, wealthy countries also focus on using tariffs to shield domestic industries and correct trade imbalances. The associated tax payments are ostensibly paid by international producers, but the situation is much more complex. [2]

Originally, for the United States, the founding fathers intended for Congress to determine tariff rates. However, during the Great Depression, presidential power was expanded. Currently, Section 232 of the Trade Expansion Act of 1962 allows the president to impose tariffs as a response to national security threats. [3]

Consumers, either individuals or companies purchasing inputs, of an economy with tariffs see higher prices. As the price of exporting the good to the buyer directly rises due to increases in tariff rates, all international sellers see a higher cost in production. Because the formerly cheaper imported goods now cost more for the producers, they pass off the cost to the consumers via increased prices. Currently, domestic consumers see a higher exchange rate as a direct result of declining trade. [4] As intended, trade falls.

Alternatively, if the country imposing tariffs is a sufficiently large consumer of a certain product, international producers must reduce their prices to remain competitive. In this case, consumers pay a post-tariff price roughly equivalent to that of domestic production. Assistant Professor of Economics and USC Dornsife Monica Morlacco comments on a specific example: “This price reduction, known as a ‘terms of trade gain’ for the U.S., ensures that the domestic price of imported coffee does not rise by the full amount of the tariff.” [5]

Nonetheless tariffs still cause damage to domestic industries. An increase of just 3.6% results in a decline in gross domestic product (GDP) of 0.4% for five years following the change. [6] As labor productivity falls under tariffs and imported part prices rise; domestic consumers are harmed by tariffs. The impact worsens over time as the tariffs are maintained.

Beyond the domestic lens, countries impacted impose retaliatory tariffs. According to Morlacco, “[Retaliatory tariffs] can compound the direct effects by reducing access to foreign markets and raising prices for other goods.” [7] During President Trump’s first term in office, tariffs were met with targeted retaliatory measures designed to impact products produced by strong supporters of the GOP. [8]

In the current day, President Donald Trump is using tariffs to address his key initiatives to reduce the rate of illegal immigration to the United States. As such, Immigration and Customs Enforcement (ICE) has been rapidly detaining individuals under his direction. When the Colombian government refused military flights of deportees, Trump threatened a combination of tariffs and sanctions. [9]

The threats included a 25% tariff on Colombian goods. The rate would increase to 50% one week after institution, amongst other restrictions. With 4% of the Colombian GDP dependent on U.S. exports, President Gustavo Petro was forced to allow the aircraft to transport the illegal immigrants even as Petro critiqued the use of a military plane and relevant conditions. [10]

Trump has similar concerns around illegal immigration and fentanyl transportation related to Mexico and Canada. Further, his agenda extends to global competition with China. On February 1st, he followed through on previous threats, placing a 25% tariff on Mexico and Canada and a 10% tariff on China and Canadian energy, a significant change from the previous rates of roughly 2%. [11] [12]

Such high rates on close trade partners of the US would likely drive up domestic inflation. In response to the tariffs, Canada and Mexico have begun to set similar rates for US exports to their countries. Specifically, according to Josh Boak of AP News, “The premier of the Canadian province of British Columbia, David Eby, specifically called on residents to stop buying liquor from U.S. ‘red’ states and said it was removing American alcohol brands from government store shelves as a response to the tariffs.” [13] Top economists such as William Reinsch, the adviser at the Center for Strategic and International Studies and a former U.S. trade official, heavily critique taxation of raw material imports claiming, “It doesn’t make much economic sense.” [14]

With the retaliation by Mexico and Canada, economists estimate households would lose $1,439 annually, on average. The tariffs alone would contribute 0.76% to an inflation rate Americans are already frustrated with. [15]

Looking forward, insurance company Nationwide’s economics division predicted economic growth falling by 0.7 percentage points, not accounting for the retaliatory tariffs. Tariff payments from the transport sector alone would rise from $4 billion to $68 billion. [16]

The Trump administration’s new tariffs went into place at midnight on March 3rd. All three countries impacted–China, Canada, and Mexico–plan or have already placed retaliatory measures in place. China responded to the 10 percent tariff with 10 and 15 percent tariffs on a variety of American food products. The 25 percent tariffs against Canada were immediately matched while identical tariffs against Mexico will receive a response by March 9th. [17] Further threats against the European Union loom. [18][19] American consumers should hope for the tariff war to end peacefully to avoid further increases to the inflation rate.

Notes:

1. Joy, Darrin S. “Tariffs: What are they, who pays for them and who do they benefit?” USC Dornsife, 2 Feb. 2025, https://dornsife.usc.edu/news/stories/tariffs-explained-by-economics-professor-trade-expert/.

2. Joy, Darrin S. “Tariffs: What are they, who pays for them and who do they benefit?” USC Dornsife, 2 Feb. 2025, https://dornsife.usc.edu/news/stories/tariffs-explained-by-economics-professor-trade-expert/.

3. Loftis, Emily. “Who has the Authority to Impose Tariffs and how does this Affect International Trade?” National Library of Medicine, May 2019, https://yeutter-institute.unl.edu/who-has-authority-impose-tariffs-and-how-does-affect-international-trade/.

4. Furceri, Davide, Swarnali A Hannan, Jonathan D Ostry, Andrew K Rose. “Are tariffs bad for growth? Yes, say five decades of data from 150 countries.” National Library of Medicine, 12 Apr. 2020, https://pmc.ncbi.nlm.nih.gov/articles/PMC7255316/.

5. Joy, Darrin S. “Tariffs: What are they, who pays for them and who do they benefit?” USC Dornsife, 2 Feb. 2025, https://dornsife.usc.edu/news/stories/tariffs-explained-by-economics-professor-trade-expert/.

6. Furceri, Davide, Swarnali A Hannan, Jonathan D Ostry, Andrew K Rose. “Are tariffs bad for growth? Yes, say five decades of data from 150 countries.” National Library of Medicine, 12 Apr. 2020, https://pmc.ncbi.nlm.nih.gov/articles/PMC7255316/.

7. Joy, Darrin S. “Tariffs: What are they, who pays for them and who do they benefit?” USC Dornsife, 1 Oct. 2024, https://dornsife.usc.edu/news/stories/tariffs-explained-by-economics-professor-trade-e.

8. Stewart, Phil, Oliver Griffin. “US, Colombia reach deal on deportations; tariff, sanctions put on hold.” Reuters, 27 Jan. 2025, https://www.reuters.com/world/americas/colombias-petro-will-not-allow-us-planes-return-migrants-2025-01-26/.

9. Stewart, Phil, Oliver Griffin. “US, Colombia reach deal on deportations; tariff, sanctions put on hold.” Reuters, 27 Jan. 2025, https://www.reuters.com/world/americas/colombias-petro-will-not-allow-us-planes-return-migrants-2025-01-26/.

10. Boak, Josh, Zeke Miller, Rob Gillies, Christopher Sherman. “Trump puts tariffs on Canada, Mexico and China, spurring trade war as North American allies respond.” AP News, 2 Feb. 2025, https://apnews.com/article/trump-tariffs-trade-china-mexico-canada-inflation-753a09d56cd318f2eb1d2efe3c43b7d4.

11. “Industrial Tariffs.” Office of the United States Trade Representative, 2 Feb. 2025, https://ustr.gov/issue-areas/industry-manufacturing/industrial-tariffs#:~:text=The%20United%20States%20currently%20has,the%20United%20States%20duty%20free

12. Boak, Josh, Zeke Miller, Rob Gillies, Christopher Sherman. “Trump puts tariffs on Canada, Mexico and China, spurring trade war as North American allies respond.” AP News, 2 Feb. 2025, https://apnews.com/article/trump-tariffs-trade-china-mexico-canada-inflation-753a09d56cd318f2eb1d2efe3c43b7d4.

13. Boak, Josh, Zeke Miller, Rob Gillies, Christopher Sherman. “Trump puts tariffs on Canada, Mexico and China, spurring trade war as North American allies respond.” AP News, 2 Feb. 2025, https://apnews.com/article/trump-tariffs-trade-china-mexico-canada-inflation-753a09d56cd318f2eb1d2efe3c43b7d4.

14. “The Economic and Fiscal Effects of the Trump Administration’s Proposed Tariffs.” The Budget Lab at Yale, 31 Jan. 2025, https://budgetlab.yale.edu/sites/default/files/2025-01/The%20Economic%20and%20Fiscal%20Effects%20of%20the%20Trump%20Administration_1.pdf.

15. “Fact Sheet: President Donald J. Trump Imposes Tariffs on Imports from Canada, Mexico and China.” The White House: Fact Sheets, 1 Feb. 2025, https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/.

16. “Canada Follows Mexico in Reaching Deal to Delay U.S. Tariffs.” The New York Times, 3 Feb 2025, https://www.nytimes.com/live/2025/02/03/us/trump-tariffs.

17. “Live Updates: Trudeau, Speaking to Americans, Blames Trump for ‘a Trade War.’” The New York Times, 4 March 2025, https://www.nytimes.com/live/2025/03/04/us/tariffs-us-canada-mexico-china?smid=url-share#4c410b47-5a9a-5644-b3da-0e3ba7e17395.

18. “Canada Follows Mexico in Reaching Deal to Delay U.S. Tariffs.” The New York Times, 3 Feb 2025, https://www.nytimes.com/live/2025/02/03/us/trump-tariffs.

19. Davidson, Paul. “Trump's tariffs on Canada and Mexico are delayed. Economic turmoil is here.” USA Today, 6 Feb 2025, https://www.usatoday.com/story/money/2025/02/06/trump-tariffs-canada-mexico-economic-impact-damage/78244024007/.

Bibliography:

Boak, Josh, Zeke Miller, Rob Gillies, Christopher Sherman. “Trump puts tariffs on Canada, Mexico and China, spurring trade war as North American allies respond.” AP News, 2 Feb. 2025, https://apnews.com/article/trump-tariffs-trade-china-mexico-canada-inflation-753a09d56cd318f2eb1d2efe3c43b7d4.

“Canada Follows Mexico in Reaching Deal to Delay U.S. Tariffs.” The New York Times, 3 Feb 2025, https://www.nytimes.com/live/2025/02/03/us/trump-tariffs.

Davidson, Paul. “Trump's tariffs on Canada and Mexico are delayed. Economic turmoil is here.” USA Today, 6 Feb 2025, https://www.usatoday.com/story//2025/02/06/trump-tariffs-canada-mexico-economic-impact-damage/78244024007/.

“Fact Sheet: President Donald J. Trump Imposes Tariffs on Imports from Canada, Mexico and China.” The White House: Fact Sheets, 1 Feb. 2025, https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/.

Furceri, Davide, Swarnali A Hannan, Jonathan D Ostry, Andrew K Rose. “Are tariffs bad for growth? Yes, say five decades of data from 150 countries.” National Library of Medicine, 12 Apr. 2020, https://pmc.ncbi.nlm.nih.gov/articles/PMC7255316/.

“Industrial Tariffs.” Office of the United States Trade Representative, 2 Feb. 2025, https://ustr.gov/issue-areas/industry-manufacturing/industrial-tariffs#:~:text=The%20United%20States%20currently%20has,the%20United%20States%20duty%20free.

Joy, Darrin S. “Tariffs: What are they, who pays for them and who do they benefit?” USC Dornsife, 1 Oct. 2024, https://dornsife.usc.edu/news/stories/tariffs-explained-by-economics-professor-trade-expert/.

Loftis, Emily. “Who has the Authority to Impose Tariffs and how does this Affect International Trade?” National Library of Medicine, May 2019, https://yeutter-institute.unl.edu/who-has-authority-impose-tariffs-and-how-does-affect-international-trade/.

Stewart, Phil, Oliver Griffin. “US, Colombia reach deal on deportations; tariff, sanctions put on hold.” Reuters, 27 Jan. 2025, https://www.reuters.com/world/americas/colombias-petro-will-not-allow-us-planes-return-migrants-2025-01-26/.

“The Economic and Fiscal Effects of the Trump Administration’s Proposed Tariffs.” The Budget Lab at Yale, 31 Jan. 2025, https://budgetlab.yale.edu/sites/default/files/2025-01/The%20Economic%20and%20Fiscal%20Effects%20of%20the%20Trump%20Administration_1.pdf.