What does Trump's latest tariff plan mean for the United States?

WASHINGTON (AP) President-elect Donald Trump has identified what he sees as a universal solution to what ails America: imposing huge new tariffs on foreign goods entering the United States.

On Monday, Trump sent shockwaves across the country's northern and southern borders, promising new tariffs on Mexico, Canada and China upon taking office as part of his efforts to combat illegal immigration and drugs.

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In two posts on his Truth Social website, Trump railed against the influx of illegal migrants, even as apprehensions at the southern border remain near a four-year low.

He said he would impose a 25% tax on all products entering the country from Canada and Mexico, as well as an additional 10% customs duty on goods from China, as part of one of his first decrees.

He said the new tariffs would remain in effect “until drugs, especially Fentanyl, and all illegal aliens put an end to this invasion of our country!” »

The president-elect says the tariffs, essentially import taxes, will create more factory jobs, reduce the federal deficit, lower food prices and allow the government to subsidize child care. 'children.

Economists are generally skeptical, viewing tariffs as a generally inefficient way for governments to raise money. They are particularly alarmed by Trump's latest tariff proposals.

Carl B. Weinberg and Rubeela Farooqi, economists at High Frequency Economics, said Tuesday that energy, autos and the food supply would be particularly hard hit.

“Imposing tariffs on trade flows into the United States without first preparing alternative sources for the affected goods and services will immediately increase the price of imported items,” Weinberg and Farooqi wrote. “As many of these goods are consumer goods, households will become poorer.”

High Frequency Economics believes the threats are not intended to support new trade policy but rather are a tool to instigate changes along the borders and for imports from Canada, Mexico and China.

Although Vice President Kamala Harris criticized Trump's tariff threats as unserious during his failed presidential bid, the Biden-Harris administration kept the taxes that the Trump administration had imposed on 360 billion dollars of Chinese products. And he imposed a 100% tariff on Chinese electric vehicles.

WATCH: Trump praises tariffs in conversation with Bloomberg News

Indeed, in recent years the United States has gradually retreated from its post-World War II role of promoting global free trade and reduced tariffs. The shift is a response to the loss of U.S. manufacturing jobs, largely attributed to free trade and an increasingly aggressive China.

They are usually charged as a percentage of the price a buyer pays to a foreign seller. In the United States, tariffs are collected by Customs and Border Protection officers at 328 ports of entry across the country.

Tariff rates range from passenger cars (2.5%) to golf shoes (6%). Tariffs may be lower for countries with which the United States has trade agreements. For example, most goods can move between the United States, Mexico, and Canada without tariffs thanks to the United States-Mexico-Canada Trade Agreement.

There is a lot of misinformation about who actually pays the rates

Trump insists tariffs are paid by foreign countries. In fact, US importing companies pay the tariffs, and the money goes to the US Treasury. These companies, in turn, typically pass on their higher costs to their customers in the form of higher prices. That's why economists say consumers usually end up footing the bill for tariffs.

Still, tariffs can harm foreign countries by making their products more expensive and harder to sell abroad. Yang Zhou, an economist at Fudan University in Shanghai, concluded in a study that Trump's tariffs on Chinese goods inflicted more than three times as much damage on the Chinese economy as on the US economy. .

Tariffs primarily aim to protect domestic industries

By raising the price of imports, tariffs can protect domestic manufacturers. They can also be used to punish foreign countries that engage in unfair trade practices, such as subsidizing their exporters or selling products at unfairly low prices.

Before the creation of the federal income tax in 1913, tariffs were a major revenue driver for the government. From 1790 to 1860, tariffs accounted for 90 percent of federal revenue, according to Douglas Irwin, a Dartmouth College economist who has studied the history of trade policy.

Tariffs fell out of favor with the growth of global trade after World War II. The government needed much larger revenue streams to finance its operations.

In the fiscal year ending September 30, the government is expected to collect $81.4 billion in customs duties and fees. That's a pittance compared to the $2.5 trillion expected to come from personal income taxes and the $1.7 trillion from Social Security and Medicare taxes.

Trump nevertheless wants to adopt a fiscal policy that resembles that which was in place in the 19th century.

He argued that tariffs on agricultural imports could lower food prices by helping American farmers. In fact, tariffs on imported food products would almost certainly raise food prices by reducing choices available to consumers and competition for U.S. producers.

Tariffs can also be used to pressure other countries on issues that may or may not be trade-related. In 2019, for example, Trump used the threat of tariffs as leverage to persuade Mexico to crack down on waves of Central American migrants crossing Mexican territory on their way to the United States.

Trump even sees tariffs as a way to prevent wars.

“I can do it with a phone call,” he said at an August rally in North Carolina.

If another country tried to start a war, he said he would issue a threat:

“We're going to charge you 100% rates. And all of a sudden the president, the prime minister, the dictator or whoever is running the country says to me, “Sir, we will not go to war. “Economists generally view tariffs as self-defeating

Tariffs increase costs for businesses and consumers who rely on imports. They are also likely to provoke retaliation.

The European Union, for example, responded to Trump's tariffs on steel and aluminum by taxing American products, from bourbon to Harley-Davidson motorcycles. Similarly, China responded to Trump's trade war by imposing tariffs on U.S. goods, including soybeans and pork, in a calculated attempt to harm its supporters in agricultural countries.

A study by economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard and the World Bank concluded that Trump's tariffs failed to restore employment to America's heartland . The tariffs “neither increased nor decreased employment in the United States” even though they were supposed to protect jobs, according to the study.

Despite the taxes imposed by Trump in 2018 on imported steel, for example, the number of jobs in American steel mills has barely changed: they have remained around 140,000. For comparison, Walmart employs its own only 1.6 million people in the United States.

Worse, retaliatory taxes imposed by China and other countries on U.S. products have had “negative employment impacts,” particularly for farmers, the study found. These retaliatory measures were only partially offset by the billions in government aid that Trump doled out to farmers. Trump's tariffs also hurt businesses that relied on targeted imports.

If Trump's trade war failed politically, it succeeded politically. The study found that support for Trump and Republican congressional candidates increased in regions most exposed to import tariffs, namely the industrial Midwest and manufacturing-intensive Southern states, such as North Carolina. and Tennessee.

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