The Era of Tariffs
Few policies in recent history—outside of wartime measures—have reshaped the global landscape as rapidly and profoundly as U.S. tariffs. In just a matter of months, the world has shifted from an era of open trade and international cooperation to one marked by protectionism, economic volatility, and growing geopolitical tension.
Our analysis by José Luis Sabau dives into the mechanics and consequences of tariffs: what they are, why they have returned to the center of U.S. policy, and how their unpredictable implementation is reverberating through economies and markets worldwide. We set aside debates over their moral justification to focus on the facts—how tariffs function, who ultimately pays the price, and why their resurgence marks a sharp departure from decades of globalization.
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Few times in history—outside of war efforts—has a single policy had the global impact of U.S. tariffs. In a matter of months, the entire political and economic landscape of the world has changed from one of open trade and dialogue to another based on protectionism and, to some degree, isolation—that’s without noting the growing hostility between nations as well as the volatility of financial markets.
Simply put, tariffs have created a new era for politics—of announcements and corrections; of economic pain and national priorities. One in which we will live for at least the next four years of president Trump’s second term.
Given the above, we wanted to dedicate this week’s ConteNido to tariffs. More specifically, to understand what they are, why they are being put in place and what their consequences have been. We will leave behind any discussion of their moral justification—it is ultimately for the reader to determine if they believe in the idea of tariffs or not. But there are still some ground facts we need to establish to have a fruitful conversation about tariffs.
Let’s start with the first and most basic question of the above list: What are tariffs? By now, you’ve probably been bombarded for weeks with some definition or another of tariffs, so we will keep this short. Tariffs, in essence, are taxes levied against imported goods to a country based on the price of said goods (more on CFR). They can be applied to all goods from a country—think of tariffs against Mexico—, a specific product—tariffs against the automotive sector—, or more generally, against all imports to a country—the so-called “blanket tariffs” which President Trump is rather fond of. Regardless, they are a tax on imports. If a product has a 10% tariff, the importer will pay 10% of the product’s price as a tax.
There is one additional fact in that last sentence that's worth nothing. Tariffs are, in principle, paid by importers of goods as they bring products to a given country (more on NYT). It is not, as some have proposed, a tax against foreign countries—if a national company is importing foreign goods, it is that company and not a foreign entity that will pay the duties to bring in products. But that is only in one case. In fact, there are only three paths of action when faced with a tariff: (a) companies increase their prices to make up for the cost of a tariff, (b) companies cut costs elsewhere to make up for the increased cost of a tariff, or (c) companies absorb the impact of tariffs and endure a reduction in profits. Options b and c—where the company takes in the impact of a tariff—are the least common.
As it turns out, tariffs tend to be passed on to consumers in the form of higher prices. The Tax Foundation even estimated that President Trump's tariffs will result in a decrease in the after tax income of U.S. households of about 1.3% (read their findings here). A recent study by the University of Pennsylvania goes as far as suggesting that the average U.S. household could lose $58k in lifetime income (read the findings here). If we consider the average wage in the U.S. is about $66.62k, that is almost like losing a year’s worth of income (more from the Social Security Administration).
This, however, wasn’t always the case. Tariffs are, as it turns out, a sharp change in direction from global policy trends over the last half a century. You see, for years, free trade had been the norm for international cooperation. Since the turn of the twentieth century—and after the economic turmoil of WWII—protectionism shifted toward globalization (more on US Funds). In part, this was by design. The logic was that countries that traded with one another had less of an incentive to fight one another in the long run—why would you bomb the factories that will eventually serve your own population?—.
The U.S. is actually the prime example. As the figure below shows, in 1890, tariffs from the US.S. averaged 29.6%—that is, importers had to pay 29.6% of the value of their goods as a tax. By 2015—the year before President Trump’s first term—the average U.S. tariff rate had dropped to just 1.5% (more on Tax Foundation)
Supporters of the Trump administration would look at this trend and signal it as the precise reason why tariffs needed to increase—and why they brought tariffs back to their highest level since 1943 (you can see an interview with commerce secretary Howard Lutnick here). The logic here goes that globalization has pushed U.S. companies abroad and, with them, a large number of U.S. manufacturing jobs. And there’s truth to this argument. Since 1979, the U.S. has lost as many as 6.7 million manufacturing jobs (more on the St Louis Fed) The country, in turn, has lost its capability of producing goods at home and has grown reliant on other nations.
President Trump is trying to fix this shift from U.S. manufacturing through tariffs—and, while at it, generate additional revenues to ameliorate the country’s $36.2T in debt (more from the U.S. Treasury). The logic here is that, by protecting U.S. companies, the country will become self-sufficient in critical areas of manufacturing and create further jobs for its citizens.
The problem is that tariffs have come in waves—and not in the usual metaphor of one tariff after another; rather as the ocean where water hits the shore and then retreats. One day, they are announced and the next they are removed. This is most clear in the last and most ambitious set of tariffs from President Trump, including a blanket 10% tariff on all goods and retaliatory tariffs for most countries in the world. But these tariffs lasted just a week before the president granted a 90-day pause (more on NYT).
That has become a worrisome trend. Since the start of his administration, President Trump has announced tariffs against other nations or products 29 times, making it highly unpredictable when tariffs will actually take hold (more on NYT). Take Mexico as an example. On February 1st, the President imposed a first set of 25% tariffs against the country which were paused two days later on February 3rd. Come February 27th and tariffs against Mexico were once again on the table only to be paused on March 6th. By April 2nd the country received special treatment with a 25% tariff applied just to non-USMCA compliant goods which was removed by April 9th. That is, three tariff promises and three tariff pauses in the span of three months.
To nobody’s surprise, the unreliable nature of tariffs has created widespread skepticism in global markets. Since the start of the year—and as of the time of writing—the S&P 500 has fallen a shocking 8.61% with tariff announcements shifting stock prices drastically (more on NASDAQ). This, in turn, has erased some $10T in market value from global financial markets (more on El País). But what’s perhaps most important is that this process has reached even the bond market where 10 year Treasury yields reached up to 4.5% (more on CNBC). In other words, there is a fear that actors are now selling U.S. bonds as well as stocks in what could be a massive sell out away from the country’s assets.
That, in sum, is the era we are living in. An era where tariffs are part of the global policy cookbook but so are tariff announcements and backtracking from them. An era where isolationism—be it justified or not—has taken a hold and building at home replaces globalized supply chains. Above all, it is a time of uncertainty, where the markets react drastically with every White House announcement. This is the era of tariffs.
Written by José Luis Sabau
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