Editor’s note, August 7, 10:30 am ET: On August 7, Trump’s tariffs went into effect for about 90 countries. The story below was originally published on April 2.
Since President Donald Trump announced a slate of new tariffs on about 90 countries last week, global financial markets have tumbled. False reports about a potential pause in tariffs gave Wall Street a brief moment of false hope on Monday, but the White House has only doubled down, threatening to add more tariffs on China. Economists have also raised the alarm, projecting that Trump’s tariffs have increased the odds of a recession.
This is just the latest update to tariff policies that have already caused a good deal of whiplash since Trump took office in January. He threatened to impose tariffs on Colombia and canceled his plan to do so all in a single day. He rolled out a tariff plan for Canada and Mexico, only to postpone implementing it shortly after some tariffs went into effect. And he’s been threatening both allies and adversaries with broad and aggressive tariffs for reasons ranging from cracking down on fentanyl to closing a TikTok deal.
To be clear, Trump’s tariff proposals are bad policy: They are far too broad, haphazard, and have confusing rationales.
But tariffs are not fundamentally unwise. “The reality is that tariffs can be, and have been, effective policy tools for promoting industrial development when they’re done in a targeted strategic way and when they are matched with other complementary policies,” said Adam Hersh, a senior economist at the Economic Policy Institute.
So what would good tariff policies actually look like?
When tariffs can be good
A tariff is a tax that’s imposed on goods imported from other countries. Oftentimes, the cost is passed on to consumers because companies will raise their prices to offset the tax.
One of the biggest reasons countries would be interested in levying a tariff is to protect domestic industries from unfair competition. Take the example of Chinese steel. China, which heavily subsidizes its steel industry, produces more than half of the world’s steel. Because demand for steel within China has not kept pace with supply, Chinese steel has become much cheaper, potentially selling at a loss in international markets.
That makes it extremely difficult for steel manufacturers elsewhere to compete, which has prompted governments to respond. Last year, the Biden administration implemented tariffs aimed at curbing imports of Chinese steel in order to protect US manufacturers.
Another example of unfair competition comes from countries with bad labor standards and very low wages. If, for example, Chinese products are cheaper than American products in part because of extremely low labor costs, the US shouldn’t respond by lowering wages to keep local companies competitive. Instead of a race to the bottom, the US can respond by imposing tariffs on certain Chinese products. That allows American companies to pay their workers well without having to sacrifice their competitiveness in the market.
Tariffs work best when they are tailored to a specific problem. “We have to start by making strategic choices about, ‘What are the industries that are important to support with public policy?’” Hersh said. “That could be for a national security reason, it could be for an economic reason, it could be because of broader social goals like fighting the climate crisis.”
Other times, a country might be interested in propping up a certain sector to make the supply chain more stable. If the United States is too reliant on other countries to provide certain goods, it can be caught in a crisis when supply chains are disrupted.
This was “a lesson learned painfully during the COVID-19 pandemic when everyone was scrambling to source personal protective equipment (PPE), respirators, and critical medicines unavailable domestically at the necessary scale,” Hersh wrote in an article with Josh Bivens, the chief economist at the Economic Policy Institute. Tariffs, in other words, can help ensure that there isn’t a monopoly over crucial imports so that supply chains aren’t completely disrupted in the event of war or, as we learned in 2020, a pandemic.
Why Trump’s tariff policy is misguided
On his first day back in the White House, Trump announced that he would try to build a whole new agency called the “External Revenue Service” to collect taxes on imports. “His goal is very simple: to abolish the Internal Revenue Service and let all the outsiders pay,” Commerce Secretary Howard Lutnick told Fox News in February.
But while tariffs were a main source of revenue for the US government before it introduced federal income taxes in 1913, Trump’s supposed plan to replace the IRS with an External Revenue Service is a terrible idea. For starters, tariffs essentially act as a flat tax on spending, which ultimately puts a higher burden on lower-income consumers. It’s also impossible for tariffs to raise nearly as much money as income tax.
This strategy also highlights why Trump’s tariff proposals are so poorly planned: He simultaneously wants to raise a significant amount of money from tariffs while also pledging to get rid of tariffs if other countries agree to his terms.
Trump’s tariffs on China, Mexico, and Canada, for example, were placed in part, he says, to stop fentanyl from flowing into the United States. So what would happen if those countries end up meeting Trump’s demands? If Trump’s plan is just to raise revenue, then clearly he wouldn’t want to come to an agreement with those countries. If his plan is to curb fentanyl, then he clearly doesn’t want tariffs to be a permanent source of revenue.
“The Trump administration has not been targeted or strategic. They have so many different rationales for why they’re pursuing tariffs, not all of them have to do with industrial revitalization,” Hersh said.
The broad-based approach is also expected to be seriously disruptive, spiking prices on all kinds of products all at once. Even Trump seemed to suggest that would be the case. “WILL THERE BE SOME PAIN? YES, MAYBE (AND MAYBE NOT!),” Trump posted on Truth Social, his social media platform. “BUT WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID.”
Another problem is that Trump seemingly believes that tariffs can stand on their own. But tariffs in and of themselves are not a solution. To be effective at protecting American companies and jobs, tariffs should be coupled with other policies that help spur investments.
Trump has proposed repealing the CHIPS and Science Act, which former President Joe Biden signed into law in 2022. The law invested tens of billions of dollars in America’s semiconductor industry by subsidizing companies that want to build new manufacturing facilities in the United States and by funding research and development.
If Trump is actually interested in using tariffs productively, he should start by first figuring out what his policy objectives actually are. He could also turn to his predecessor for answers. The Biden administration’s approach to propping up the semiconductor industry, for example, was to impose some tariffs in addition to the CHIPS Act, using tariffs as just one tool of many to support industry growth. Trump, by contrast, wants to just rely on tariffs without committing to long-term investments. That won’t deliver the same goal.
Ultimately, it’s important to remember that just because Trump’s approach to tariffs is bombastic and unpredictable, that shouldn’t necessarily be a reflection on tariffs more broadly. At the end of the day, tariffs exist for a reason, and, if implemented well, they can be a beneficial tool to shore up jobs, promote better wages, and advance national interests. “We can’t judge the tool,” Hersh said, “by the craftsman that is mishandling it.”
Update, April 8, 6 am ET: This story was originally published on April 2 and has been updated with the latest on Trump’s tariffs.
Abdallah Fayyad
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