(Bloomberg) — The United States heavily taxed imports for much of its history before largely abandoning that policy, starting in the 1930s when government leaders embraced the idea of ​​free trade. High tariffs made a comeback under President Donald Trump, who adopted them in an effort to revitalize U.S. manufacturing and counter what the United States considers unfair trade practices by China. Trump’s successor, Joe Biden, continued the trend.

Today, Trump says that if he is re-elected president on November 5, he will significantly increase taxes on imports and make them the center of his economic policy. His pledge has reignited debate over whether tariffs are a valuable tool to compete with economic rivals or a political weapon with a checkered past that could be turned against them.

What is Trump proposing?

He proposed increasing tariffs to 60% for goods imported from China and 20% for those imported from the rest of the world. The United States currently imposes tariffs in these ranges or higher on some categories of goods, but imposing them at this level everywhere would be a radical change. Currently, for imported industrial goods, which account for 94% of U.S. merchandise imports by value, the country charges a trade-weighted average tariff rate of 2%, according to the Office of the U.S. Trade Representative. This figure can be calculated by dividing the total value of imports by the total tariff revenue. Half of industrial products enter the United States duty-free. According to a Bloomberg Economics analysis published in October, Trump’s tariff proposals “would raise average U.S. levies above 20%, a level not seen since the early 20th century.”

Could Trump raise tariffs unilaterally?

Yes, although in some cases it would be necessary to first obtain a conclusion from one of the federal agencies that report to the president. Through a number of laws, Congress has empowered the U.S. president to change tariffs to address various concerns. These include a threat to national security, war or emergency, harm or potential harm to a U.S. industry, and unfair trade practices by a foreign country . Although companies could try to fight higher tariffs in court, because of the deference given to presidential powers in the past, such challenges “would face a steep uphill climb,” according to an article published by the Center for Strategic & International Studies and co-authored by Warren. Maruyama, former general counsel for the Office of the United States Trade Representative.

How do the rates work?

A customs duty, also called a duty or levy, is usually calculated as a percentage of the product’s value, but it can also be levied as a fixed amount on each item. Goods moving across borders are assigned numerical codes according to a standardized nomenclature called the “internationally harmonized system.” Rates can be assigned to specific product codes, like that of a truck chassis, or to broader categories, like electric vehicles. Customs agencies collect tariffs on behalf of governments.

Who pays the rates?

Customs duties are actually paid by the importer or an intermediary acting on behalf of the importer, although costs are usually passed on. Trump argues that ultimately it is exporters who pay the tariffs. Studies have shown that the burden is more diffuse. The foreign company that manufactures the product may decide to lower its prices to appease the importer. Or it could spend significant sums to build a factory elsewhere to avoid tariffs. Or an importer – Walmart and Target are among the largest in the United States – could raise the prices consumers pay at checkout.

How have opinions on tariffs evolved in the United States?

The first U.S. tariffs – a 5% tax on all imports – were signed into law in 1789 by President George Washington. The goal was primarily to increase revenue for a fledgling government and, secondarily, to protect the nascent American manufacturing industry from foreign competition in order to diversify the American economy, which was heavily agricultural.

Until about 1900, tariffs accounted for more than half of the U.S. government’s revenue. As other types of taxes took their place, they became less essential. (Even with increases in recent years, tariffs today represent a fraction of Uncle Sam’s revenue.) What’s more, tariffs have come to be seen as harmful.

The effects of the Smoot-Hawley Act of 1930 became the textbook case against tariffs. The law was initially intended to protect American farmers but was expanded as other industries pushed for its inclusion. This resulted in an average increase of about 20% in import duties, according to an article by trade historian Douglas Irwin. Smoot-Hawley provoked tariff retaliation from foreign governments, leading to a decline in world trade and a worsening of the Great Depression.

In 1934, President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, which launched a new model of tariff reductions based on the belief that increased international trade would fuel the American economy. The law paved the way for the International General Agreement on Tariffs and Trade of 1947, a set of agreements aimed at breaking down trade barriers between countries. In the aftermath of World War II, support for free trade among Western countries was fueled by the belief that trading partners would be less likely to go to war with each other.

GATT was the precursor to the World Trade Organization, created in 1995. Based in Geneva, the WTO has 166 members who represent 98% of world trade. Although the overall goal of the WTO is to reduce barriers to trade, it has rules for imposing tariffs, for example when large quantities of products are “dumped” on markets or when goods are produced with the help of public subsidies.

Where does China fit into all this?

During these years, belief in free trade was supported by a bipartisan consensus in the United States and by multinational corporations that wanted access to cheap, efficient supply chains abroad. But China’s rise as a global economic power has shattered the consensus. Admitted to the WTO in 2001, China has gained greater access to global markets, although its critics say it has broken the letter and spirit of free trade rules, for example by subsidizing its industries and forcing foreign companies operating in China to part with their know-how. how. A number of researchers have concluded that Chinese competition triggered a decline in employment among U.S. manufacturers facing a surge in imports.

The Trump administration imposed new tariffs on Chinese imports worth about $380 billion in 2018 and 2019. The Biden administration maintained those levies and increased more this year on goods from ‘an additional value of 18 billion dollars. The new craze for customs tariffs has spread to the European Union. He voted in early October to impose tariffs of up to 45% on electric vehicles from China, which threatened to retaliate against European products.

During the 2024 election campaign, Trump argued that across-the-board import taxes would have benefits beyond defending domestic industries: they would flood the Treasury with billions in revenue, push out companies that don’t produce goods to the United States to do so, and allow the United States to obtain concessions from its trading allies and rivals. Trump’s Democratic opponent in the election, Vice President Kamala Harris, criticized his plan to raise tariffs, calling it a “national sales tax” that would hurt consumers. But it has not defined its own trade agenda.

How have tariff hikes affected the United States so far?

It can be difficult to determine the economic effects of tariffs. They can boost employment by attracting investment as companies try to circumvent tariffs by relocating their factories to the country imposing the taxes. At the same time, they can provoke retaliatory tariffs that will cost jobs in other sectors of the economy.

In a highly regarded article published by the National Bureau of Economic Research, authors David Autor, Anne Beck, David Dorn and Gordon Hanson concluded that Trump’s 2018-2019 tariffs failed to increase employment in protected industries, while harming employment in targeted sectors. by retaliatory tariffs, particularly agricultural ones.

Economists are still disentangling the inflationary effects of Trump’s initial tariffs from a much larger shock to supply chains and economic activity that began shortly after the US trade war began. United States and China: the Covid-19 pandemic.

In February 2019, the San Francisco Federal Reserve estimated that the tariffs added 0.1 percentage points to consumer price inflation and 0.4 percentage points to a metric measuring businesses’ investment costs. Erica York, senior economist at the nonpartisan Tax Foundation, estimates that the Trump-Biden tariffs increase the average annual household tax bill by $625.

Additionally, York estimates the hikes will eliminate 142,000 full-time jobs and, over the long term, reduce gross domestic product by an average of 0.2%. Critics of Trump’s proposal to dramatically raise tariffs fear it could have the same kind of effects, on a much larger scale.

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