All countries in the world, including the United States, use trade barriers in conducting international business with other countries.
Reasons as to why a country would use trade barriers include:
1) protecting jobs and industries
2) protecting consumers
3) safeguarding national security interests
4) retaliating against trade practices of other countries
5) achieving foreign policy objectives
6) safeguarding human rights
7) protecting the environment.
Trade barriers can take the form of tariffs and non-tariff barriers
a). Tariffs, that is, a duty or tax, can be either a specific duty or an ad valorem duty.
1). A specific duty will tax each item in the shipment. For example, each item in a 1,000 item shipment will be individually taxed.
2). An ad valorem duty, on the other hand, will tax the whole shipment, generally on a percentage basis of the fair market value of the shipment. For example, a 1,000 item shipment could have a market value of $10,000. If the ad valorem duty is 10%, then the duty will be $1,000. Today, most countries use the ad valorem duty. For example, past U.S. Presidents, to include President Trump, have used ad valorem duty in dealing with other countries’ trade practices.
b). Non-tariff barriers, as the name implies, is not a tax or duty. It can take the form of quotas, subsidies, product context requirements, product standards and specifications, distribution channels, business practices, foreign investments and loans, even currency manipulation.
Tariffs are one of the economic tools being used by President Trump to address the 1.2 trillion-dollar trade goods deficit in 2024 and the U.S. National Debt which is approaching 37 trillion dollars.
It is important to note that the U.S. trade goods deficit can add indirectly to the U.S. National Debt. Each year, the trade deficit has to be paid. If the U.S. doesn’t have the funds available, then the U.S. has to seek out domestic and foreign loans which can add to the U.S. National Debt. Since the 1970s, foreign investors have owned more and more of the U.S. National Debt. Today, about 30% of the U.S. National Debt is foreign owned.
Tariffs can lead to higher prices because companies tend to pass the higher product cost to the consumers. Higher prices can also lead to a higher inflation rate, potentially reducing consumer spending and company earnings and expansion. A key factor in the tariff’s impact is the consumers’ spending behaviors like willingness to use substitutes, or to delay purchases, or to pay the higher price for the product. The unavailability of a product could also lead to manufacturing the product domestically.
Can tariffs lead to sustained inflation? It depends on how long the tariffs are kept in place which can lead to global supply chain disruptions and potential trade wars with other countries.
The key to using tariffs is to know when to lift them. There is no scientific answer to this.
It appears that the Trump Administration’s two-tier tariff plan is working in getting countries to negotiate with the U.S. Only time will tell how successful the plan is. With around 50 countries willing to negotiate, the U.S. has the opportunity to achieve a better playing field in trade than it had in 2024. Lower export and import prices will be beneficial to both businesses and consumers not only here in the U.S. but also worldwide.
Tariffs are just part of the economic challenge facing the U.S. in trying to lower the U.S. National Debt and U.S. trade goods deficit which have to be addressed for long-term U.S. economic growth and prosperity. It is a painful process but a necessary one.
Gary L. Lefort
President, BGS
Tel. 413-566-5544; bgslefort@gmail.com