A Riff On Tariffs

These days, I’m inundated with ads about tariffs—why they’re good for the economy or bad for my wallet. So I decided to look closer. What exactly are tariffs, and who do they really help?

What are tariffs?

At their core, tariffs are taxes placed on imported goods by a government. When an imported product arrives, a tariff is added to its cost, making it more expensive than it would have been without the tax.

So how do tariffs really work?

When a foreign product is taxed at the border, the importer pays the tariff. Does the importer just absorb this additional cost? Generally not. Instead, they try to pass as much of the cost as possible onto consumers — raising the final price of the imported product.

As a result, the price of foreign goods increases. With fewer affordable imports available, domestic producers face less competition—often using this opportunity to raise prices for local goods as well. In this way, tariffs can drive up prices across the board, not just for imports.

So why impose tariffs in the first place?

The primary goal of tariffs is to protect domestic industries. By making foreign products more expensive, tariffs aim to encourage consumers to buy local goods, fostering job creation and reducing reliance on foreign production. In theory, this supports economic stability.

But is it really that straightforward? Not quite.

Hidden Costs Of Tariffs

While tariffs may benefit certain industries in the short term, they often come with hidden costs—a classic case of what economists call the 'broken window theory,' where one visible benefit conceals greater, less visible harms.

For example, many domestic manufacturers depend on imported raw materials or components. When tariffs increase the cost of these inputs, production costs also rise. Consequently, even domestic goods become more expensive, challenging the very protection tariffs are supposed to provide.

Consider the impact of tariffs on the U.S. steel industry.

In 2018, tariffs on imported steel were increased by 25%. While this helped steel manufacturers, it hurt industries that rely heavily on steel, like construction and automotive. A report by the Federal Reserve found that these tariffs led to a 0.3% increase in U.S. manufacturing costs in 2018 alone. In this way, tariffs often create ripple effects that extend beyond the industries they aim to protect.

The Case of the Chicken War

The 1960s Chicken War was primarily a trade dispute between the United States and several European countries, notably France and West Germany.

It began when European nations imposed high tariffs on cheap, imported American chicken, which was flooding their markets. This move hurt U.S. poultry exports, prompting the U.S. government to retaliate. In response, the U.S. imposed tariffs in 1964 on several European goods, such as trucks, brandy, and potato starch.

The most significant result of the Chicken War was a 25% tariff on imported trucks, which persists to this day.

This example illustrates not only how tariffs can escalate into trade wars, but also how their effects linger, reshaping entire industries for decades.

Broader Economic Consequences

Tariffs rarely exist in isolation; their impacts often extend beyond domestic prices, affecting international trade dynamics as well.

If Country A imposes tariffs on Country B’s goods, Country B typically responds in kind. This back-and-forth can escalate quickly, resulting in full-blown trade wars that stifle economic growth. According to a study by the International Monetary Fund, global tariffs imposed in recent trade tensions—particularly between the U.S. and China—reduced global GDP by 0.4% by 2019.

As seen in the Chicken War, this back-and-forth can escalate into a trade war, with both countries’ economies suffering. Exports decline, industries lose foreign markets, and economic growth slows.

Innovation Under Threat

When domestic companies have less competition they do not feel the need to innovate. The absence of competitive forces eventually leads to complacency, slowing improvements in quality, efficiency, and technology. Ironically, tariffs, in the long run, might weaken domestic industries that are less prepared for future global competition.

Who Bears the Real Cost?

Do tariffs truly benefit consumers? While they may preserve jobs in certain sectors, they generally raise the cost of living. In 2019, the New York Federal Reserve estimated that U.S. tariffs on Chinese goods cost the average American household about $831 annually. Low-income consumers, who allocate a significant portion of their income to essential goods, feel this burden of increased cost of living most acutely.

Are Tariffs a Protective Shield or a Self-Inflicted Wound?

So, do tariffs achieve their intended goals? They protect domestic industries—but at the cost of higher prices, reduced competition, stalled innovation, and the risk of trade wars.

Are these sacrifices worth it, or do tariffs ultimately weaken the very industries they aim to shield? The answer isn’t simple, but one thing is clear: tariffs don’t just protect—they reshape economies.

But do they do more harm than good? That depends on your time horizon and your perspective.

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