Wariness of tariffs seemed to have long ago soaked into the fabric of US popular culture.
“Did it work?” a teacher asked his listless high school students in the 1986 film Ferris Bueller’s Day Off, after explaining the good intentions behind US tariff legislation passed nearly four decades earlier.
Eventually, the teacher answers his own question: “It did not work, and the United States sank deeper into the Great Depression.”
Ferris Bueller was made by American boomers, still basking in a post-Second World War era that seemed to confirm the material benefits of increasingly orderly, globalized trade. Tariffs didn’t quite fit into that picture.
Average US tariff rates fell from 18.4% in 1934, a few years after the maligned legislation referenced in Ferris Bueller, to well under 2% by 2007.
Times have apparently changed. The US recently announced plans for expansive new tariffs on goods from Canada, Mexico and China, purportedly to stem the flow of illegal migrants and drugs (both Canada and Mexico have since won a 30-day reprieve).
US tariffs have declined in recent decades, except for during President Trump’s first term.
Historically, these taxes on foreign imports have appealed to political leaders seeking to protect domestic markets from cut-rate goods, while nurturing local manufacturing and workforces.
However, experts say they tend to result in a war of attrition. Other countries retaliate and costs get passed on to consumers; and increased inflation, which gets economists’ antennae tingling, can result.
This is how a tariff typically works:
A country can decide it wants to target, say, sheep imported from a place called Erewhon. Companies operating in the country can still import sheep from Erewhon, they just have to pay a specified tariff rate per sheep to their own government. In theory, those foreign sheep then become more expensive and less desirable than homegrown sheep. In reality, the extra demand for relatively affordable domestic sheep raises prices across the board.
And, when Erewhon eventually responds with its own tariffs, things get even more complicated.
For people paying close attention to the workings of the global economy, excessive tariffs risk fragmentation, which equals less trade, which results in fewer tangible benefits for everyone – on balance.
When is a tariff good?
But even in global trade’s heyday, tariffs were a fact of life. In 2008, when goods exports as a percentage of global GDP topped out at a pre-financial-crisis 25%, the US filed a complaint over European tariffs on its computer monitors and printers that were as high as 14%.
Joe Biden, who succeeded Trump as president in 2020, kept many of his predecessor’s initial, first-term tariffs in place; tariffs that Biden applied himself to electric cars and solar panels were seen by some as reasonable means to spur the US’s own green technology efforts.
When they’re deemed relatively judicious and sparing, tariffs don’t tend to draw much notice.
But when they feed into the sort of “trade-war dynamics” flagged in the World Economic Forum’s most recent Chief Economists Outlook, they can raise concerns about broader harm to global trade – and to the benefits that trade tends to generate.
During Trump’s first term, his administration escalated trade tensions with China through the use of punishing tariffs. The average tariff rate paid on goods coming into the US jumped from 1.7% in 2017 to 13.8% in 2019.
The two countries signed a trade deal in 2020, which was cited as a victory in the US, though its actual benefits have been questioned. According to one analysis, the bulk of the proceeds raised through China tariffs in this period were used to aid US farmers, who were struggling with the impacts of both a trade war and a global pandemic.
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Today, the focus is also on countries traditionally considered close trading partners of the US; despite agreeing to a 30-day pause before implementing new 25% tariffs on goods from Canada and Mexico, the White House has signaled it plans to follow through.
The US is the export destination for 77% of Canada’s traded goods; no other country accounts for more than 5%. In response, Canada has announced its own retaliatory 25% tariffs on a broad range of American products. Mexico has also vowed retaliation.
Meanwhile, China plans countermeasures in light of the 10% tariff levied on its wares, which has now come into effect.
The tariff surge appears to have taken many experts by surprise. Maybe it shouldn’t have.
Just a few years after the release of Ferris Bueller’s Day Off, a wealthy New York real-estate developer offered his own public thoughts on the value of tariffs – after losing an auction to a rival bidder from a booming Japan.
“I believe very strongly in tariffs,” Donald Trump said then, while suggesting that Japanese goods should be hit with rates as high as 20%.
Source: World Economic Forum
