Tariffs and Trade Wars

A tariff is a tax on imported goods. It's the oldest and most common trade barrier.

How Tariffs Work

When the US puts a 25% tariff on imported steel:

• A Chinese steel producer selling at $100/ton now costs $125/ton in the US market
• US steel producers become more competitive (their prices haven't changed)
• US consumers and industries that use steel pay higher prices
• The US government collects tariff revenue

Why Countries Use Tariffs

• Protect domestic industries — Shield home producers from cheaper imports ("infant industry" protection)
• National security — Maintain domestic capacity in strategic industries (steel, semiconductors)
• Retaliation — Punish other countries for unfair trade practices
• Revenue — In some developing countries, tariffs are a major source of government revenue
• Bargaining chip — Threaten tariffs to win concessions in negotiations

Other Trade Barriers

• Quotas — Limits on the quantity of goods that can be imported
• Subsidies — Government payments that make domestic goods artificially cheap
• Non-tariff barriers — Regulations, standards, and bureaucratic requirements that effectively block imports (e.g., Japan's food safety regulations that make rice imports nearly impossible)

The US-China Trade War

The most significant trade conflict of the 21st century:

2018: Trump imposed tariffs on $360 billion of Chinese goods, citing intellectual property theft and unfair subsidies. China retaliated with tariffs on $110 billion of US goods.

Key tariffs:

• 25% on steel and 10% on aluminum (global, not just China)
• 25% on $250 billion of Chinese goods (electronics, machinery, components)
• China's retaliatory tariffs hit US agriculture — soybean exports to China dropped 75%

Impact:

• US consumers paid an estimated $80 billion more annually in higher prices
• US farmers needed $28 billion in government bailouts
• Global supply chains began shifting — some manufacturing moved from China to Vietnam, Mexico, India
• Neither country clearly "won" — both economies absorbed costs

2024-2025: Tariffs remain largely in place under Biden, with additional restrictions on Chinese technology (chips, EVs, solar panels). The era of US-China free trade is over.

Worked Example: Who Actually Pays a Tariff?

A tariff is legally paid by the importer, but its economic burden is split between buyers (higher prices) and foreign sellers (lower net prices), depending on how sensitive each side is to price.

Suppose the US imposes a 25% tariff on a washing machine that previously landed at $500.

Economists studying the 2018 US washing-machine tariffs (Flaaen, Hortaçsu & Tintelnot, 2019) found pass-through was nearly complete — US consumers bore the great majority of the cost, and prices of domestic machines and even dryers rose too. The lesson: 'making foreigners pay' rarely happens; when demand for the import is inelastic, the domestic consumer pays.