{"id":21625,"date":"2024-10-01T17:30:05","date_gmt":"2024-10-02T00:30:05","guid":{"rendered":"https:\/\/dornsife.usc.edu\/news\/?p=21625"},"modified":"2025-04-17T14:11:35","modified_gmt":"2025-04-17T21:11:35","slug":"tariffs-explained-by-economics-professor-trade-expert","status":"publish","type":"post","link":"https:\/\/dornsife.usc.edu\/news\/stories\/tariffs-explained-by-economics-professor-trade-expert\/","title":{"rendered":"Tariffs: What are they, who pays for them and who do they benefit?"},"content":{"rendered":"\n\n\n    \n                                          \n\n  \n    \n\n\n\n\n\n\n<div\n  class=\"cc--component-container cc--article-hero \"\n\n  \n  \n  \n  \n  \n  \n  >\n  <div class=\"c--component c--article-hero\"\n    \n      >\n\n    \n<div class=\"inner-wrapper\">\n          \n<div class=\"f--field f--image\">\n\n    \n    \n    \n    \n    \n    \n              \n      <img\n                            data-src=\"https:\/\/dornsife.usc.edu\/news\/wp-content\/uploads\/sites\/7\/2024\/10\/tariffs_morlacco_top-768x432.jpg\"\n          data-srcset=\"https:\/\/dornsife.usc.edu\/news\/wp-content\/uploads\/sites\/7\/2024\/10\/tariffs_morlacco_top-1920x1080.jpg 1920w,https:\/\/dornsife.usc.edu\/news\/wp-content\/uploads\/sites\/7\/2024\/10\/tariffs_morlacco_top-1280x720.jpg 1280w,https:\/\/dornsife.usc.edu\/news\/wp-content\/uploads\/sites\/7\/2024\/10\/tariffs_morlacco_top-768x432.jpg 768w\"          data-sizes=\"(min-width:1200px) 75vw, (min-width:768px) 83vw, 100vw\"          class=\"lazyload\"\n        \n                  alt=\"Fearful Humpty Dumpty labeled \u201cExcessive Protections\u201d slips from a \u201cTariff Wall\u201d as men hold him with a \u201cStand Pat\u201d strap\"\n        \n        \n                                      \/>\n\n    \n    \n  \n  \n\n<\/div>\n  \n      <div class=\"image-caption\">\n          \n<div class=\"f--field f--description\">\n\n    \n  <em>Humpty Dumpty slips from the wall; Humpty&#8217;s due for an awful fall<\/em> \/ K. Udo J. Keepler\u2019s 1913 political cartoon depicts the impending end of tariffs used to protect U.S. domestic monopolies. (Composite: Letty Avila. Image source: Library of Congress.)\n\n\n<\/div>\n    <\/div>\n  \n  <div class=\"text-wrapper\">\n          <nav aria-label=\"Breadcrumb\" class=\"breadcrumbs\">\n        <ul>\n                      <li><a href=\"\/news\/stories\/\">News<\/a><\/li>\n                      <li><a href=\"\/news\/stories\/\/?category=politics\">Politics<\/a><\/li>\n                  <\/ul>\n      <\/nav>\n    \n              \n<div class=\"f--field f--page-title\">\n\n    \n  <h1>Tariffs: What are they, who pays for them and who do they benefit?<\/h1>\n\n\n<\/div>\n    \n          <div class=\"subtitle\">\n            \n<div class=\"f--field f--description\">\n\n    \n  In response to heightened interest in tariffs resulting from recent political proposals and policies, a USC Dornsife economics professor and expert on trade explains the ins and outs of these international taxes.\n\n\n<\/div>\n      <\/div>\n    \n           <strong class=\"author-field\"><span >By<\/span><a href=\"mailto:communication@dornsife.usc.edu\">Darrin S. Joy<\/a><\/strong>\n    \n          <span class=\"post-date-field\">October 1, 2024<\/span>\n      <\/div>\n<\/div>\n\n\n  <\/div><\/div>\n\n  \n    \n\n\n\n\n\n\n<div\n  class=\"cc--component-container cc--social-share \"\n\n  \n  \n  \n  \n  \n  \n  >\n  <div class=\"c--component c--social-share\"\n    \n      >\n\n    \n  <div class=\"content-wrapper\">\n    <span class=\"a2a_kit a2a_kit_size_32 addtoany_list\" style=\"line-height: 32px;\">\n      <span class=\"title\">\n        Share\n      <\/span>\n                        <a class=\"a2a_button_copy_link\" target=\"_blank\" href=\"\/#copy_link\" rel=\"nofollow noopener\" title=\"Link\">\n            <span class=\"a2a_svg a2a_s__default a2a_s_copy_link\">\n              <svg height=\"19\" viewBox=\"0 0 19 19\" width=\"19\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\"><path d=\"m7.43475275 9.52380952-2.17490843 2.26076008c-1.08745421 1.058837-1.68841575 2.518315-1.68841575 4.0350275 0 1.5167124.60096154 2.9475732 1.68841575 4.0350274 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xmlns=\"http:\/\/www.w3.org\/2000\/svg\"><path d=\"m8.14285714 9.42857143c-.17142857 0-.34285714 0-.51428571.08571428l7.28571427 6.34285719c.3428572.2571428.6857143.2571428.9428572 0l7.2857142-6.34285719c-.0857142-.08571428-.2571428-.08571428-.4285714-.08571428zm-1.28571428 1.11428567v.1714286 8.5714286c0 .6857143.6 1.2857143 1.28571428 1.2857143h14.57142856c.6857143 0 1.2857143-.6 1.2857143-1.2857143v-8.5714286c0-.0857143 0-.0857143 0-.1714286l-7.2 6.3428572c-.7714286.6857143-1.8857143.6857143-2.6571429 0z\" fill-rule=\"evenodd\" transform=\"translate(-6 -9)\"\/><\/svg>\n            <\/span>\n            <span class=\"a2a_label visually-hidden\">Email<\/span>\n          <\/a>\n                  <\/span>\n  <\/div>\n\n  <\/div><\/div>\n \n\n\n\n  \n    \n\n\n\n\n\n\n<div\n  class=\"cc--component-container cc--rich-text \"\n\n  \n  \n  \n  \n  \n  \n  >\n  <div class=\"c--component c--rich-text\"\n    \n      >\n\n    \n      \n<div class=\"f--field f--wysiwyg\">\n\n    \n  <p>The United States government first implemented tariffs shortly after the Constitution\u2019s ratification to help fund the young nation\u2019s government. Over time, these taxes on internationally traded goods largely fell out of favor, only to resurface between World Wars I and II before fading again. Recently, tariffs have once again emerged as a favored policy tool, sparking debate over their impact and effectiveness.<\/p>\n<p><a href=\"https:\/\/dornsife.usc.edu\/profile\/monica-morlacco\/\">Monica Morlacco<\/a>, assistant professor of <a href=\"https:\/\/dornsife.usc.edu\/econ\/\">economics<\/a> at the USC Dornsife College of Letters, Arts and Sciences, recently answered questions about tariffs, including how they work, who they benefit and who pays the price for them.<\/p>\n<h2>What is a tariff and what is its function?<\/h2>\n<p>A tariff is a tax placed on goods when they cross national borders. The most common type is an <strong>import tariff<\/strong>, which taxes goods brought into a country. There are also <strong>export tariffs<\/strong>, which are taxes on goods a country exports, though these are rare. The United States does not allow export tariffs; the Constitution (Article I, Section 9) forbids them.<\/p>\n<p>Tariffs are typically imposed for <strong>protection<\/strong> or <strong>revenue<\/strong> purposes. A protective tariff increases the price of imported goods relative to domestic goods, encouraging consumers to buy from local producers, who are thus \u201cprotected\u201d from foreign competition. A revenue tariff, on the other hand, is mainly used to generate money for the government.<\/p>\n<h2>How long have tariffs existed globally, and more specifically, in the U.S.?<\/h2>\n<p>Tariffs have been used for centuries. In the U.S., they have been in place since 1789, with the first major tariff law passed to help fund the new government.<\/p>\n<p>Over time, the importance of tariffs as a source of government revenue has declined, particularly in wealthier countries. For example, in 1900, tariffs accounted for more than 41% of U.S. government income, but by 2013, that number had fallen to just 2%. However, many developing nations, like the Bahamas and Ethiopia, still rely on tariffs for a significant portion of their revenue.<\/p>\n<p>While the revenue-raising role of tariffs has diminished, they have made a comeback for protectionist purposes, often being imposed temporarily to shield specific industries or address trade imbalances. In 2018, for example, the U.S. imposed several waves of tariffs on specific products, sectors and countries, raising import tariffs from an average of 2.6% to 17% on more than 12,000 products.<\/p>\n<h2>Who has the power to authorize a tariff?<\/h2>\n<p>In the U.S., Congress has the power to set tariffs. However, under specific laws, the president can also impose tariffs, particularly in cases involving national security or in economic emergencies.<\/p>\n<h2>Who pays a tariff and who benefits from it?<\/h2>\n<p>In the U.S., it\u2019s the importer \u2014 the company or entity bringing the goods into the country \u2014 that pays the actual tariff to U.S. Customs and Border Protection, part of the Department of Homeland Security. This payment occurs when the goods enter the country, though the true financial impact extends beyond the initial payer.<\/p>\n<p>The impact of a tariff depends on whether the country imposing it is \u201clarge\u201d or \u201csmall\u201d in terms of its ability to influence world prices.<\/p>\n<p>Generally, economists define a \u201clarge open economy\u201d as one whose demand or supply can influence the world price of a good. Conversely, \u201csmall open economies\u201d cannot influence global prices.<\/p>\n<p>For instance, Vietnam, while geographically small, is the third-largest exporter of coffee. Its trade policies can significantly affect global coffee prices, making it a large open economy in that market. In contrast, a sprawling country like Russia plays a relatively minor role in global coffee imports and exports, meaning it has little effect on world coffee prices, classifying it as a small open economy with respect to coffee.<\/p>\n<p>When a large open economy imposes an import tariff, several effects follow. Consider the example of the U.S. imposing a tariff on coffee imports:<\/p>\n<ol>\n<li><strong>Higher prices for imported coffee:<\/strong> The price of imported coffee rises, making it more expensive for U.S. consumers and businesses, such as coffee shops.<\/li>\n<li><strong>Terms of trade gain:<\/strong> Because the U.S. is a large open economy, the tariff can reduce the world price of coffee. Foreign producers, like those in Vietnam, may lower their prices to retain access to the large U.S. market. This price reduction, known as a \u201cterms of trade gain\u201d for the U.S., ensures that the domestic price of imported coffee does not rise by the full amount of the tariff.<\/li>\n<li><strong>Reduced trade volume:<\/strong>\u00a0Lastly, the total volume of coffee traded decreases. Higher prices reduce U.S. demand for imported coffee, and foreign producers end up selling less coffee, causing a decline in worldwide coffee exports.<\/li>\n<\/ol>\n<p>If a small open economy imposes a tariff, the effects are more straightforward. Foreign producers have no incentive to lower their prices, since the small economy\u2019s demand is too insignificant to affect the world market. As a result, the price of the imported goods rises by the full amount of the tariff. Moreover, the overall trade volume decreases just as in the case of a large economy, but without any terms of trade gain.<\/p>\n<h2>Who is adversely affected by a tariff and how?<\/h2>\n<p>In a large open economy such as the U.S., the effects of a tariff are mixed. Consumers, both individuals and businesses, are negatively impacted by higher prices. However, the domestic industry protected by the tariff, such as U.S. coffee producers, benefits by being able to sell more of their product. The government also benefits by collecting additional revenue from the tariff.<\/p>\n<p>The overall effect depends on whether the benefits, like terms of trade gains, outweigh the losses from changes in production and consumption patterns. If the terms of trade gains are larger than the negative effects, the country can benefit. If not, the overall effect is a loss. For a small country, there are no terms of trade gains, so tariffs generally result in worse outcomes by raising prices and reducing trade.<\/p>\n<p>The effects described above assume that everything else remains constant, meaning only the tariff in a specific sector changes. However, an important factor to consider is that when a country imposes tariffs on other nations, those nations often retaliate by imposing tariffs of their own \u2014 so-called \u201cretaliatory tariffs.\u201d These can compound the direct effects by reducing access to foreign markets and raising prices for other goods.<\/p>\n<p>This is exactly what occurred in 2018 when the U.S.. imposed tariffs, prompting retaliatory tariffs from China, the European Union and others. In total, these retaliatory actions affected around $121 billion of U.S. exports, escalating the negative impacts beyond the original tariffs.<\/p>\n<h2>Any recommended reading for those who want to learn more about tariffs?<\/h2>\n<p>A helpful reference on the subject is the book <a href=\"https:\/\/www.pearson.com\/en-us\/subject-catalog\/p\/international-economics-theory-and-policy\/P200000005956\/9780137465699\"><em>International Economics: Theory and Policy<\/em><\/a> by Paul R. Krugman, Maurice Obstfeld and Marc Melitz. Another well-regarded text is <a href=\"https:\/\/store.macmillanlearning.com\/us\/product\/International-Trade\/p\/1319218458\"><em>International Trade<\/em><\/a> by Robert C. Feenstra and Alan M. Taylor.<\/p>\n<p>For a deeper analysis of the costs associated with the 2018 U.S. tariffs, <em>The Economist\u2019s<\/em> article \u201c<a href=\"https:\/\/www.economist.com\/united-states\/2018\/09\/08\/who-pays-for-tariffs\"><em>Who Pays for Tariffs?<\/em><\/a>\u201d offers valuable insights. <em>[Editor\u2019s Note: This article may require a subscription.]<\/em><\/p>\n\n\n\n<\/div>\n\n\n  <\/div><\/div>\n\n\n\n  \n        \n  \n    \n\n\n\n\n\n\n<div\n  class=\"cc--component-container cc--article-related-stories \"\n\n  \n  \n  \n  \n  \n  \n  >\n  <div class=\"c--component c--article-related-stories\"\n    \n      >\n\n    \n  <div class=\"inner-wrapper\">\n              \n<div class=\"f--field f--section-title\">\n\n    \n  <h2>\n          Related Articles\n      <\/h2>\n\n\n<\/div>\n    \n                  <article>\n              \n<div class=\"f--field f--cta-title\">\n\n    \n  <h3>\n          <a href=\"https:\/\/dornsife.usc.edu\/news\/stories\/impact-of-tariff-plans-explained-by-economist\/\" \n                        class=\"\" \n      >Economist explains impact of Trump\u2019s tariff plans<\/a>\n      <\/h3>\n\n\n<\/div>\n        <\/article>\n              <article>\n              \n<div class=\"f--field f--cta-title\">\n\n    \n  <h3>\n          <a href=\"https:\/\/dornsife.usc.edu\/news\/stories\/how-trump-taunts-and-tariff-added-to-justin-trudeau-woes\/\" \n                        class=\"\" \n      >Trudeau taps out: How Trump\u2019s taunts and tariff threats added to domestic woes confronting Canada\u2019s long-standing PM<\/a>\n      <\/h3>\n\n\n<\/div>\n        <\/article>\n              <article>\n              \n<div class=\"f--field f--cta-title\">\n\n    \n  <h3>\n          <a href=\"https:\/\/dornsife.usc.edu\/news\/stories\/why-trump-finds-greenland-strategically-appealing\/\" \n                        class=\"\" \n      >Expert on Arctic politics explains Greenland\u2019s strategic appeal<\/a>\n      <\/h3>\n\n\n<\/div>\n        <\/article>\n            <\/div>\n\n\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Interest in tariffs has increased due to recent political proposals and policies. Economics professor Monica Morlacco explains the ins and outs of these international taxes.<\/p>\n","protected":false},"author":13,"featured_media":21626,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[10,50],"tags":[111,95],"class_list":["post-21625","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-faculty","category-politics","tag-economics","tag-social-sciences"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Tariffs: What are they, who pays for them and who do they benefit?<\/title>\n<meta name=\"description\" content=\"Interest in tariffs has risen due to recent political proposals \u2014 a USC Dornsife economics professor explains these international taxes\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, 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