President-elect Donald Trump has said, "the most beautiful word in the dictionary is tariff, and it’s my favorite word." So what are they? Why might the United States raise or lower a tariff on goods from another country? How has America used tariffs throughout our history? And how might Donald Trump's proposed tariffs affect the cost of goods in the US?
Taking us through tariffs is Dr. Shannon O'Neil, senior vice president and director of studies at the Council on Foreign Relations.
Transcript
Archival: Trump says, quote, on January 20th, as one of my many first executive orders, I will sign all necessary documents to charge Mexico and Canada a 25% tariff on all products.
Archival: When you put a tariff on, it is not that the other country gets taxed per se, it's that the cost gets pushed on to the consumer. Here in the United States. That's how it works, Christine.
Archival: We're seeing the markets already reacting. But talk to us in terms of what goods, what industries, what kind of impact it's going to [00:00:30] have on Americans.
Archival: Just about everything you touch.
Nick Capodice: You're listening to Civics 101. I'm Nick Capodice.
Hannah McCarthy: I'm Hannah McCarthy.
Nick Capodice: And today, at the behest of several listeners, including a good many social studies teachers, we are talking about tariffs. And yes, before we begin, tariffs are about money.
Hannah McCarthy: You kind of hate talking about money, don't you, Nick?
Nick Capodice: I do Hannah. I hate it, and every time I admit on this show that economics always make [00:01:00] my eyes glaze over a little bit. I get this well-intentioned email saying, well, Nick, you really should pay attention to finances. And that's absolutely true. And I should have flossed a lot more when I was a kid. That said, I now love learning about tariffs. My eyes have cleared up and I hope by the end of this some of you all are in the same boat.
Hannah McCarthy: All right, let's do it. Start at the top. What are tariffs.
Shannon O'Neil: So tariffs are basically taxes.
Nick Capodice: This is Doctor Shannon O'Neil vice president [00:01:30] at the Council of Foreign Relations and author of The Globalization Myth.
Shannon O'Neil: They're just like the taxes that you pay when you go to the grocery store or when you get your bill at a restaurant, the tax that's put on the bottom, the difference is a tariff is a tax on things that are coming from outside the country. So think of it as a sales tax, but it's for things that are imported into the United States.
Nick Capodice: I want to add here that there are also export tariffs, but those are not what we're generally referring to specifically in this news cycle. Today [00:02:00] we are talking about import tariffs.
Hannah McCarthy: Okay. And when it comes to these import tariffs do you think that you could give me a hypothetical. Like what does it actually look like.
Nick Capodice: Absolutely. Sure.
Shannon O'Neil: So for example there are terrorists that are put on what economists would call finished goods. So that is when a car comes in from Mexico or comes in from Japan, it could have a tariff on it. It could be 2%. It could be 20%.
Hannah McCarthy: Okay. I'm following here. Let's say it's a car that comes to [00:02:30] America from Japan, like a Mazda miata or something.
Nick Capodice: All right, so the Miata, the Mazda miata is created in Japan. It is sold to someone in the US, an importer, for $20,000. So if there is a 20% tariff on cars from Japan, that means instead it costs $24,000. That extra $4,000 goes right to the US government.
Hannah McCarthy: And who pays that money? Who has to actually give that 4000 to the [00:03:00] government as.
Nick Capodice: An excellent question. It's one I wondered as well. The importer. Does the company or person who buys the car from Japan to sell somewhere down the chain? That is, who pays the $4,000? It is collected by a customs official at one of our 300 plus ports. People in other countries do not pay the tariff.
Archival: We're going to have 10 to 20% tariffs on foreign countries that have been ripping us off for years. We're going to charge them [00:03:30] 10 to 20% to come in and take advantage of our country, because that's what they've been doing for nothing.
Nick Capodice: Now, president elect Donald Trump has said on numerous occasions that he will impose tariffs and make other countries pay more. But again, it is the importer, the person in the US, not in the other country, that pays the tariff. And furthermore, tariffs don't just affect someone selling stuff made in other countries. It affects a ton of stuff [00:04:00] made right here in America.
Shannon O'Neil: You also see tariffs on things that go into the making of things here in the United States. So that could be, for instance, in your local bakery, they're making chocolate chip cookies. Well, you know what. We don't grow cocoa beans here in the United States. So those cocoa beans are coming in from another country and you could have a tariff on them. We also don't grow vanilla beans. So if you have vanilla in your cookies or cinnamon in your cinnamon rolls, those two are likely coming from abroad and are going to your local bakery that mixes them [00:04:30] in and makes your favorite treat.
Hannah McCarthy: Do we currently have any tariffs on vanilla beans?
Nick Capodice: Well, Hannah, to know that we're gonna have to check the old handy dandy harmonized tariff schedule. This is the document that lists the tariff rates for every single thing that is imported into the United States. Now, to be clear, the BTS doesn't set those rates. This is just the database to get an idea of how much it will cost to import any given item. This is a thrilling 4000 page document [00:05:00] that anybody can look up, and vanilla sits right there on the page, nestled between ground pimento peppers and cinnamon. So it says there are no current tariffs on vanilla bean or crushed. And determining tariff rates is an art. It's a science. The US Customs and Border Protection website, they give the example of a wool suit. It says that somebody classifying how much it will cost to import needs to know. Quote does it have darts? [00:05:30] Did the wool come from Israel or another country that qualifies for duty free treatment for certain of its products? Where was the suit assembled? Does it have any synthetic fibers in the lining? And seriously, Hannah, anything you can imagine and it's tariffs are in that document. Handmade lace bagpipes primate meat.
Hannah McCarthy: Primate meat?
Nick Capodice: Primate meat! Primate meat has a 6.4% tariff, by the way, half as much as handmade lace. Interestingly
Hannah McCarthy: Tell me that someone [00:06:00] has made a board game about this.
Nick Capodice: How about I tell you that future tariffs might impact board game costs?
Hannah McCarthy: All right, another worry for another day. Uh, Nick, why do we have tariffs in the first place? Why would we have a high tariff on handmade lace and none on vanilla beans?
Shannon O'Neil: So there are various reasons why one would put tariffs in. One is because you want to make those things here in the United States.
Nick Capodice: You know, I picked the handmade lace [00:06:30] thing because I thought it was pretty funny. But it works. As an example, part of the reason we have that tariff is the US wants people to buy handmade lace made here in the good old US of A, and naturally that sentiment extends to things that are a little more important in our everyday life.
Shannon O'Neil: We decide, you know, we want to make semiconductor chips because we want to have that technology here and we want to have a capacity here in case other people stop selling to us. That will [00:07:00] have the chips to have laptops and iPhones and, you know, Department of Defense fighter jets and things like that. That's one reason to have them.
Nick Capodice: And to that point, Congress in 2018 set some pretty high tariffs on things like electric cars, solar cells and semiconductors made in China, specifically.
Hannah McCarthy: Because we are developing the ability to make electric vehicles here in the United States. So putting a high tariff on electric vehicles from a country that makes them for [00:07:30] a much lower cost and sells them at a much lower cost, can support the American electric car industry.
Nick Capodice: Absolutely right. And here's reason number two for tariffs. Tariffs used to be the way that we did things in the United States from the 1800s until the end of World War two. We espoused a protectionist philosophy.
Hannah McCarthy: Protectionist, I'm assuming, because we were still a fairly infant nation. We were trying [00:08:00] to get our feet under us. And when it comes to high tariffs, I'm assuming that supported our industry, right. It stopped us from relying on other countries for goods, which helped us to grow.
Nick Capodice: Exactly.
Shannon O'Neil: So tariffs were one of the things that the US government long ago used to raise money. We were a different economy then. We were a very agricultural based economy. So we sold lots of cotton and other agricultural products to more developed, more sophisticated economies in Europe. At [00:08:30] the time, we imported it from the UK. At the time, Britain, or we imported it from countries across Europe. So we wanted to protect our industries. So we put lots of tariffs on there where it would be 50 or 100% more expensive to import British made cloth in order to create a cloth industry here in the United States. That's one example. We did it too, with basic machinery. You think about all kinds of, you know, wrenches and hammers and things like that, that to they at the time were better at making iron than we were that putting [00:09:00] together, you know, various chemicals and the like. And so we protected those industries to encourage companies or inventors and the like to come here and, and set up those industries here so those industries can prosper. The challenge is if you put lots of tariffs on particular economies, is that then lots of other economies put tariffs on you. And so it's very hard for those goods that you make here, whether it's cloth or it's hammers or things like that back in the day, or [00:09:30] whether it's semiconductor chips today or iPhones or other sophisticated products that the United States is really good at making. It's hard for us to sell to the other people because they put tariffs on our goods and make them much more expensive when we try to sell it to consumers around the world.
Hannah McCarthy: Now, you said we had this protectionist philosophy Until World War two. How did the war change? The way we approached tariffs?
Nick Capodice: Well, after World War Two and continuing on [00:10:00] through the Cold War, there was a very clear us versus them mentality. And economists shifted to a free trade model. Capitalist countries could sell stuff to each other without being hindered by tariffs. America had a pretty well-established industry at this point, so now it was time for everyone to get rich selling stuff to each other.
Hannah McCarthy: And Nick, we're talking about tariffs right now because president elect Donald Trump has said that he [00:10:30] will bring them back in a big way.
Archival: I'm a big believer in tariffs. I think tariffs are the most beautiful word. I think they're beautiful. It's going to make us rich.
Hannah McCarthy: Do people see this as a step toward encouraging American industry the same way we did in the 1800s?
Nick Capodice: I mean, it could be seen that way. But Shannon says that we like the global We? We just don't work that way anymore.
Shannon O'Neil: The problem or the challenge with that is when you try to make it all here at home. You can make those goods more expensive. And what [00:11:00] has happened over these last 30 or 40 years with globalization and supply chains, global supply chains that we talk all about, especially since the pandemic. You know, the benefit of those is that products become much cheaper because an individual factory can make, you know, a particular product, a pair of socks, not just for, you know, people in Iowa, but for the people all over the world. They can potentially make socks for 8 billion people. And so they get to what economists call an economy of scale, [00:11:30] where they're churning out so many socks that each of those socks costs much less individually than if you're just at home darning your own socks in your living room. The benefit for us is you and I go to Walmart or Target or your local store that you like, and we can buy a pair of socks for a couple of dollars. You couldn't do that 40 years ago because of those the difference in the way the economies work. But we also don't make a lot of socks here in the United States anymore. And that is why one might put tariffs on. If you wanted to make socks again in the United States, [00:12:00] you probably would have to put pretty high tariffs on you. And I would start paying $20 maybe for a pair of socks, not $2 for a pair of socks. Um, but they would be made here in the United States.
Nick Capodice: Real quick, there's another reason we sometimes impose tariffs, and that's to discourage the use of something like tobacco or certain kinds of alcohol.
Hannah McCarthy: What do you mean by certain kinds of alcohol?
Nick Capodice: Oh, there's like, oh, there's a whole megillah. I can't get into it [00:12:30] about how the EU put a tariff on American whiskey because of a tariff the US had on airplane manufacturing. Whiskey makers in the US were hit hard because Europeans bought less of it due to the tariff. And then we have that. The Trump administration put a massive tariff on wine from Europe, except for Italy for some reason. And the Biden administration reversed the wine tariff. But it's on the horizon to return in 2025. Okay.
Hannah McCarthy: Hearing that, Nick, it makes me feel like tariffs are more [00:13:00] an element in the global conversation, right? It's about maybe rewarding another nation or sort of slapping the hand of another nation, more so than it is about encouraging industry in your own nation.
Nick Capodice: Wonderfully put.
Hannah McCarthy: So our tariffs that are they just a tool in the diplomatic utility belt.
Nick Capodice: Well, I will get into that utility belt as well as a deep dive on Trump's proposed tariffs. [00:13:30] But first we got to take a quick break.
Hannah McCarthy: But before that break Nick and I wrote a book about all of the many things we have learned about America over the years. I don't think we have tariffs in there, do we?
Nick Capodice: I don't think we did, but we didn't know at the time everything else is in there.
Hannah McCarthy: Though we did put a lot in there. It is called A User's Guide to Democracy How America Works.
Hannah McCarthy: We're back.
Hannah McCarthy: We're talking about [00:14:00] tariffs here on Civics 101. And Nick, you know we're not a couple of seers here.
Speaker10: Soothsayers, augurs cassandras.
Hannah McCarthy: That one is debatable. Anyway, my point is that we cannot predict the future. But I do think we should talk about president elect Donald Trump's proposed tariffs. What are they?
Nick Capodice: So some of Trump's tariff promises have vacillated over the last few months. But here is what he claimed this November. He has proposed a blanket [00:14:30] 25% tariff on all goods coming from Mexico and Canada, and a 60 to 100% increase on tariffs on all goods coming from China. Also a 10 to 20% tariff on everything else from everyone else.
Hannah McCarthy: And is it the president who sets a tariff? Is that an executive power?
Nick Capodice: Well, the Constitution says no. The Constitution grants Congress the power to set tariffs. Article one, section eight. However, in 1934, [00:15:00] Congress signed the Reciprocal Trade Agreement Act, which gave the executive branch the power to set tariffs with congressional approval. And Franklin Delano Roosevelt was the first to do that, and since then there have been about a half a dozen other acts signed into law ceding tariff powers to the president, given certain situations.
Hannah McCarthy: How do economists generally view tariffs? What are their feelings about these proposed sweeping tariff changes that might [00:15:30] happen with the incoming administration?
Nick Capodice: All right. Here again is Doctor Shannon O'Neil, VP at the Council on Foreign Relations.
Shannon O'Neil: So the research shows, and even the tariffs that we've seen over the last eight years has shown that these are costly for us consumers. Um, and there's different kinds of tariffs. The tariffs in the past have often been targeted tariffs, meaning they choose particular products or particular sectors. So it's not saying everything that comes in from China has [00:16:00] a 60% tariff. It's saying, you know, things that come in from China that are in the electronics space. So electronics that come in from China, they're going to have a 20% tariff. Uh, toys that come in from China, they're going to have a 20% tariff, clothing that comes from China, that's going to have a 25% tariff. So it's choosing particular products. And what the research has found over the last eight years, since those tariffs went into place, is that it raised prices in those sectors for US consumers. So [00:16:30] the prices of those goods that have tariffs, they went up.
Hannah McCarthy: Does Shannon have any idea of how much prices might go up with Trump's proposed tariff increases?
Nick Capodice: Well, she didn't give me an exact number, but the Peterson Institute for International Economics released a study in August 2024 that estimated these increases would result in a cost of $2,400 per family per year. And it hits hardest for those with less money. They write that all households, [00:17:00] quote, lose net income from such high tariffs, but the losses are greatest for those at the bottom of the income distribution. The median household would expect to see its after tax income fall by about 4.1%. The top 1% would experience net gains in income because their losses from tariffs are more than offset by Trump's proposed tax cuts, end quote.
Hannah McCarthy: What about the effect tariffs have on who we buy from? I imagine that if there's a super high tariff [00:17:30] on one country, we're going to get stuff from another country.
Nick Capodice: Yeah we will. And Shannon said that this is something that her research has made abundantly clear.
Shannon O'Neil: We put a tariff on clothing coming in from China, we don't bring as many clothes in from China as we did in the past, we bring in clothes from other countries. Now we bring it in from Thailand. We bring it in from Malaysia, we bring it in from Mexico or Central American nations. So you see a shift in trade with those tariffs into the United States. And you also see, in some cases, a rise [00:18:00] in US prices of those goods, because that tariff gets passed along to individual consumers. It costs more on the shelf when you buy it at the store or on Amazon.
Hannah McCarthy: Can we come back to the diplomacy thing? It sounds like tariffs are part of this diplomatic toolkit, so to speak. Does stopping free trade with other countries have an effect on how we interact with them, deal with them in other matters?
Nick Capodice: It absolutely does.
Speaker9: So in the past.
Shannon O'Neil: Often we turn to countries that we like, countries that are our [00:18:30] allies or our partners, and we say, hey, let's do a free trade agreement, let's bring our economies closer to each other, and we'll buy and sell more from each other. And one thing we'll do Diplomatically but also economically is we will reduce tariffs. In fact, we might get rid of all tariffs between our two countries because, you know, we trust each other. We think that you're a strong economy on your side would be good for us because we're allies. We're partners around the world. And we want prosperous allies out there. One, because they could come support us if we get into a fix [00:19:00] and there's a war or there's a conflict, we want them to be able to contribute.
Nick Capodice: Like I say, the Toby Ziegler was completely right when he gave his speech on the West Wing about free trade.
Toby Ziegler: Clothes are cheaper, steel is cheaper, cars are cheaper, phone service is cheaper. You fill me building a rhythm here. That's because I'm a speechwriter. I know how to make a point, Toby. The lowest prices. It raises income. You see what I did with lowers and raises there? Yes. It's called the science of listener attention. We did repetition. We did floating opposites. And now you end with the one that's not like the others. Ready? Free trade stops wars. [00:19:30] And that's it. Free trade stops wars.
Nick Capodice: By the way, if you look up the science of listener attention, you're going to see it was completely fabricated for this episode. But to Toby's point, when you trade with another country, it does grease the wheels for other diplomacy. If you and another country are both prospering from each other, you're probably going to have an easier time negotiating other stuff. But diplomacy is not the only reason we trade. [00:20:00] We trade because we want stuff and we don't have everything.
Shannon O'Neil: We don't make coca. You want chocolate chips right in for for your pancakes, for your cookies, for whatever it is that you like. There's lots of other things that are produced around the world that we want to have as consumers here in the United States. And importantly, we want to be able to sell the things that we make here that support U.S. jobs in countries around the world. And, you know, 95% of the world's population lives outside of the United [00:20:30] States. Wouldn't it be great if they were buying products that were made in the United States? They're much more likely to buy products if there are no tariffs when it goes into that country. So signing a free trade agreement where we say, hey, in the United States, you can bring your your products in with zero. But if we go to your country, you have zero tariffs on your products, then we get to export our products to Mexico or South Korea or Peru or Singapore or other places where we have free trade agreements. We [00:21:00] get to export to those countries without paying any tariffs on our goods. And so their consumers don't have to pay more to buy American products.
Nick Capodice: And Hannah, I don't want to end this episode with you thinking tariffs are capital B bad. Shannon says they have their purpose and they can be justified.
Shannon O'Neil: There are places for tariffs. It's not that they should never be used and there are a couple reasons to use them. One is if other countries are being unfair [00:21:30] in the way they make things and they're favoring their own companies, it's not fair for our companies to try to participate or try to compete against others that have a bigger advantage. So let's say in China you're neo, you're making electric vehicle cars, and the Chinese government promises to buy lots and lots of cars for all of the taxi stands all over Shanghai from a particular company. Well, that company has a leg up because they know they have all these orders. Or let's say the government gives them free electricity or free land. [00:22:00] Well, US companies, GM, Ford, they don't get free electricity and land. So that's not fair in terms of the price of the car. So there's a reason perhaps to put a tariff on.
Nick Capodice: And another reason we might have tariffs is because frankly, it can be a national security issue.
Hannah McCarthy: How is it related to national security?
Nick Capodice: Well, think of war, right? The war machine. 50 years ago, it was tanks and bombs. We used to fight and protect ourselves. And that is a lot of steel. That's a lot of aluminum. We [00:22:30] need to be able to produce our own steel and aluminum, in case we end up in a conflict with our biggest steel and aluminum suppliers. But war is not just tanks and bombs anymore. It's drones, semiconductor chips, satellites. War will be fought in the skies. And I'm not talking about airplanes. And it is so scary to me, Hannah, that I'm going to leave the Tim Curry space joke until the credits.
Hannah McCarthy: All right. So tariffs [00:23:00] have a place. They are a kind of insurance for if and when we enter a conflict. And there are some times they can help level the playing field. If another country is producing goods with what we perceive to be an unfair advantage.
Nick Capodice: Yeah. The problem though, and this isn't just Shannon's belief, by the way. 16 Nobel Prize winning economists signed a letter this June expressing concern about Trump's proposed tariffs. The problem is that they're not [00:23:30] targeted. They're just a percentage on a country, not on a specific item.
Shannon O'Neil: Broad based tariffs. When you put these on broadly, the challenge is it makes U.S. products more expensive. And that has two things it means we're not going to sell to we're not going to sell our products, our goods to other countries because it'll just be too expensive. Other goods made in other places will be cheaper. And so a consumer will buy, you know, a toy or a computer or [00:24:00] a shirt from others because it'll just be cheaper, better made perhaps, or similarly made, but cheaper. So that's one reason. But the other thing is actually in the United States, if you're buying something that's made just in the United States, in this global world, it's going to be more expensive here for the United States as well. So if you're going to buy socks, you could buy socks for $2, or you could buy socks for $20. You might buy fewer pairs of socks if they're going to cost you $20 than if they cost you $2. So [00:24:30] that means for the people who make socks, who make the cotton or the wool that goes into the socks, they're going to sell fewer pairs. That means the store that you go to, you're going to visit fewer times to go and buy the socks. That means the clerks that work there maybe don't need as many clerks. Maybe you don't need as many stores. It means other parts of the economy begin to slow down and you start losing jobs. You start losing consumption. And that is a big driver of US prosperity. So there's a cost, not just in access [00:25:00] to the rest of the world and consumers that are in countries on the other side of the world. There's also a cost to the US economy because Americans stop buying as many things. That means there's fewer jobs to make the things that Americans might buy. And we see our economy slow overall.
Tim Curry as Premier Cherdenko in Red Alert 3: I'm escaping to the one place that hasn't been corrupted by capitalism.....SPACE
Nick Capodice: Well there you go isn't that just a bit of tariffic. this episode was made by me Nick Capodice with you Hannah McCarthy thank you. Christina Phillips is our Senior Producer and Rebecca Lavoie our Executive Producer. Music in this episode from Epidemic Sound, Blue Dot Sessions, ProletR, HoliznaCCO, Bisou, and heaven help us if there's ever a tariff on the beats by Chris Zabriskie. Civics 101 is a production of NHPR, New Hampshire Public Radio.