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A Tariff Primer Tariffs are a sales tax on imports and economists are united in opposition to their use. By Lynn MacDonald and Tim Salmon
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lassical economic theory tells us that trade should occur between two countries when one country can produce a good relatively cheaper than the other. When this occurs, it benefits both countries as the one buying the relatively cheaper good can focus its production elsewhere. This frees up resources to go to their highest valued use, yields more total production for both countries, and builds wealth and prosperity for both countries. Tariffs interfere with this process, depriving both trading partners of potential gains. This is why economists have a consensus view against the use of tariffs.
Tariffs can be targeted toward specific products or they can be applied across the board to all imports. Regardless of type, a main point of contention about tariffs concerns who bears the burden of the tax. Importers physically pay the tax, but this does not mean they bear the burden. In some cases, tariffs can force the exporting firm to lower their prices to remain competitive. If this happens, exporters will end up bearing the burden of some or all of the tariff. However, lower prices will only happen if consumers can avoid the tariff by purchasing alternative goods. If consumers do not have good substitutes, then this does not
Contributors ________ Lynn MacDonald, Ph.D. is an associate professor of economics at St. Cloud State University and director of the SCSU Center for Economic Education. Tim Salmon, Ph.D. is a professor of economics at Southern Methodist University in Texas.
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happen and consumers bear more of the burden. Across the board tariffs ensure there are no lowertaxed options available and results in consumers bearing the burden. This dynamic is demonstrated by estimates showing U.S. consumers paid around 93 percent of the cost of the tariffs imposed in 2018, according to a 2023 study published by the Munich Society for the Promotion of Economic Research. Tariffs are sometimes imposed with the goal of boosting both domestic production and manufacturing jobs. A targeted tariff (e.g., a tariff on cars) could allow domestic producers to use the resulting price advantage to boost production and sales. However, when inputs to their production are also subject to the tariffs (e.g., steel), their production costs rise, offsetting any price advantage. Targeted tariffs may improve domestic production in some industries. Across-theboard tariffs are unlikely to achieve this goal. Even if domestic production rises, it is not clear that this will generate an increase in manufacturing jobs. The 2024 Annual Report on the U.S. Manufacturing Economy published by the National Institute of Standards and Technology revealed that production in the U.S. has grown steadily and the U.S. remains the second largest manufacturer in the world, behind China. This is true despite the fact that U.S. manufacturing jobs have been falling, according to the Federal Reserve Bank of St. Louis. These trends move in opposite directions
because U.S. production relies on capital-intensive technologies, allowing firms to produce more with fewer workers. U.S. manufacturing is highly productive already, and further expansions might not end up creating additional jobs. While tariffs generally don’t lead to domestic employment gains, they are sometimes a useful negotiation tactic toward reducing trade barriers. Since the 1940s, the U.S. has led a worldwide decline in trade barriers with average worldwide tariffs approaching 2 percent prior to 2025, according to data from Macrotrends.net. Private negotiations using targeted tariff threats (as part of a larger strategy) have proven fruitful in this process. It is doubtful that publicly-made, across-the-board tariff threats will generate the same success. International trade flows are largely about consumer demand. Reducing our trade deficits with other countries requires U.S. firms to successfully market their goods to citizens of other countries. Publicly threatening other countries turns foreign consumers away from U.S. products. Policies that increase global demand for U.S. products have a better chance of diminishing trade deficits. While there are situations in which a targeted tariff can achieve strategic goals, widespread tariffs are not conducive to economic growth. They harm both consumers and producers by way of higher prices. Such tariffs decrease the wealth and welfare of all countries involved and can actually worsen trade deficits.