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What are tariffs, and how do they work?
What are tariffs, and how do they work?
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0:06
In 1930, as the Great Depression ravaged the United States,
0:11
President Herbert Hoover made a bold economic decision.
0:15
With the goal of supporting American farmers and manufacturers,
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he approved a sweeping 20% tax
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on all imported agricultural and industrial goods.
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He believed making foreign goods more expensive
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would encourage consumers to buy domestic,
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thus funneling cash into American businesses and creating more jobs.
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But Hoover's plan completely backfired.
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Other countries retaliated by taxing American goods,
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leading exports to fall and global trade to decline.
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In the end, this policy led American prices to spike
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and caused even more unemployment.
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These disastrous outcomes of the Smoot-Hawley Tariff Act
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were no surprise to the over 1,000 economists
1:01
who publicly condemned the bill.
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But this wouldn’t be the last time a world leader was shocked
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by a tariff's consequences.
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So, what exactly is a tariff?
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A tariff is a tax an importer pays to bring foreign goods into a country.
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For example, if they import $1,000 worth of goods at a 10% tariff rate,
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they'll pay $100 to the government in addition to $1,000 to the seller.
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Foreign exporters could respond to a tariff by reducing their product’s price
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to keep an importer’s business.
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But if they don’t, importers bear this cost
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and then increase their prices so consumers will make up the difference.
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This may sound straightforward,
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but enacting a tariff kicks off a complicated economic chain reaction.
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So to keep things simple,
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let's look at some examples from just one country
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to explore some of the factors that make a tariff’s outcomes tricky to predict.
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First, tariffs can be applied to different countries at different rates.
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For example, in 2024,
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America had a 6% tariff on all wool entering the country.
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However, if that wool came from Mexico or South Korea,
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it would be tariff-free due to trade agreements.
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Meanwhile, importers getting wool from Russia could face a hefty 55.5% tariff.
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Policies like these might help domestic wool producers,
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or they might just encourage importers to buy from specific foreign producers.
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Things get even trickier when trying to predict how tariffs impact jobs.
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Sometimes the jobs they create come at a high cost.
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In 2018, the US imposed a tariff on washing machines
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that created 1,800 jobs
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and raised roughly $82 million in government revenue.
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However, it also increased the average price of washing machines by $86,
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costing consumers roughly $1.5 billion.
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This means consumers paid roughly $817,000 to create each of those jobs.
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In other cases, the jobs tariffs create come at the cost of existing jobs.
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In 2002, the Bush administration imposed tariffs as high as 30%
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on imported steel.
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Employment in US steel production had been decaying for decades,
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so by making foreign steel more expensive,
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the tariff sought to create new jobs for US steel manufacturers.
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Initially, the policy did slow down job loss.
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But since US steel still cost more than pre-tariff foreign steel,
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domestic industries that used this material had to increase their prices.
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This made their products less competitive internationally,
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where foreign manufacturers were still using cheap steel.
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Within a year of enacting the tariff,
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the US lost far more jobs in steel-related industries
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than they gained in steel-producing industries.
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Clearly, how other countries respond to tariffs
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is another big part of the ripple effect these policies have.
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One clear example comes from 2018,
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when the US attempted to address its trade deficit with China
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by taxing Chinese goods.
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While these tariffs protected domestic businesses
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and raised government revenue,
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they also set off a trade war.
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China retaliated by raising tariffs on US exporters,
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including farmers relying on Chinese markets for soybean sales.
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In the end, this led to higher prices for US consumers
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and a slight drop in America's GDP.
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Trade wars aren’t new.
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And even in the 18th and early 19th centuries,
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when certain tariffs did help struggling industries find their domestic footing,
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they were mostly used to raise government funds.
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But over the last 200 years,
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our global economy has become far more interdependent.
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Today, there are more manufacturing components
5:01
being imported than ever before,
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many of which are used to make a wide variety of consumer goods.
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This complexity means that even a seemingly simple tariff
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can trigger a global chain reaction,
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creating more consequences than anyone can plan for.
