Tariffs invite retaliations and retaliations lead to all-out trade wars.
If a single word can sum up world economic activity in the first five months of 2025, that word would be ‘tariffs’. Since Jan. 20, when Donald Trump began his second presidency of the world’s largest economy, the greatest economic preoccupation of the world’s governments and business communities has been with the American President’s policy of imposing ‘reciprocal tariffs’ on all imports into the U.S.
Imposed on friends and adversaries alike, the tariffs ranged from 10 percent – the general figure – all the way to 145 percent on Chinese exports to the U.S. The tariff on Philippine exports has been set at 17 percent, the second lowest among the Association of Southeast Asian Nations (ASEAN) member-countries.
Every day during the last five months, the world’s news media have carried stories related to Trump’s tariff frenzy – actual and threatened retaliations by the tariff-targeted countries, learned analyses of the impact of the new U.S. tariffs, forecast of disruptions of supply chains and expressions of deep concern about the tariffs’ impact on production arrangements and consumer prices. People who knew little or nothing about tariffs before Jan. 20 were now hearing and reading about them every day.
Trump has told the American people – especially his Make America Great Again (MAGA) supporters – that his tariff campaign would accomplish two things, viz., (1) stop the “ripping off” of America by other countries and (2) compel American companies to transfer their overseas manufacturing operations back to the U.S. Claim No. 1 is false; claim No. 2 is improvable.
Like millions of people around the world, the average American has been left confused and perplexed by all the rhetoric, hype and, yes, disinformation associated with Trump’s tariff rampage. Under the circumstances, I think that there is a need for a brief refresher on (1) what a tariff is and is not and (2) the proper use and improper use of a tariff.
First, a tariff is an economic policy tool whose legitimate uses are trade protection and revenue generation. It is called a tariff, but in reality it is a tax, the taxed goods being the exports of other countries. A tariff is an exception to the international fiscal rule that a country cannot tax goods that are not produced within its borders.
Second, as a fiscal instrument, a tariff can be used purely for revenue-generation purposes. Used positively, a county can impose or raise, for revenue generation purposes, a tariff on a foreign product that is generating much profit for its foreign manufacturer. Used negatively, a tariff can be deployed not as a legitimate economic policy tool but as a geopolitical weapon for harassment, intimidation or coercion.
Third, a tariff is an economic policy instrument intended to accomplish three principal objectives, viz, encourage the transformation of an economy, regulate the flow of foreign goods into an economy and protect a country’s terms of trade. Developing countries wishing to transform their economies from primary-producing to manufacturing usually set their tariff on foreign manufactured goods at levels that will be protective of their infant manufacturing establishments.
Countries set their tariffs at low levels for goods that are necessary for production and consumption – especially basic goods for the masa – and at high levels for goods whose entry they wish to discourage. And countries impose defensive countervailing tariffs on foreign goods that are produced in an unfair manner, e.g. through the enjoyment of subsidies from their governments.
Fourth, a tariff always has price repercussions except in the very rare case where the importer absorbs the tariff entirely. The pass-on can occur either directly from importer to consumer (in the case of consumer products) or from the producer-importer to the merchandiser and ultimately to the consumer (in the case of producer goods). Except in the no-pass-on case the consumer will always end up bearing at least a part of the tariff. Which is why the world’s central banks have had to reconsider their monetary-easing intentions.
Fifth, imposition of a tariff is essentially a hostile act, and, like all hostile acts, must be undertaken only after the most careful evaluation of its broad economic implications.
Finally, tariffs invite retaliations and retaliations lead to all-out trade wars. The world has been in an undeclared trade war since Jan. 20, 2025, thanks entirely to the Trump administration’s mindless tariff program.
(llagasjessa@yahoo.com)
