Principles of Government: Tariffs

This article marks the beginning of a new series, Principles of Government, where we explore key legal concepts shaping public discourse. Our goal is to provide a clear, unbiased, and nonpolitical explanation of these issues, allowing readers to form their own opinions on the social, political, and economic impacts. As new developments arise, we will continue expanding this series to keep you informed.

Tariffs have been a widely discussed issue recently, particularly as President Trump considers implementing new or increased tariffs on imported goods. More broadly, tariffs have played a central role in U.S. trade policy for centuries, shaping economic growth, international relations, and domestic industries. While they are often used to protect American businesses from foreign competition, tariffs can also lead to higher prices for consumers and retaliatory measures from other countries.

Agriculture, in particular, has long been sensitive to tariffs. Farmers and agribusinesses rely on imported equipment, fertilizers, and other inputs, meaning tariffs can raise production costs. At the same time, American agricultural products exported abroad can be subject to retaliatory tariffs, making them more expensive and less competitive in foreign markets. Understanding how tariffs work, who pays them, and the legal authority behind their implementation is crucial for assessing their broader economic and political impact. In this article, we will break down the fundamentals of tariffs, their role in U.S. trade policy, and the source of authority to impose tariffs.

What Is a Tariff?

A tariff is a tax or duty imposed by a government on imported goods. Tariffs serve several purposes, including generating revenue for the government, protecting domestic industries from foreign competition, and sometimes serving as a tool in international trade negotiations. When a country imposes tariffs, it raises the cost of imported goods, making domestically produced alternatives more competitive. Tariffs are typically applied as a percentage of the value of the imported goods but can be a fixed amount per unit of goods.

Who Pays the Tax on a U.S. Tariff?

When the U.S. imposes a tariff on imported goods, the tax is paid by the importer of record, typically a U.S. company or individual bringing the goods into the country. The foreign exporter does not pay the tariff directly. Instead, the importer must pay the tariff before the goods clear customs.  To offset this cost, the importer may either pass it on to consumers through higher prices or absorb it, reducing their profit margin.

Where Does the Tax Go?

The tariff revenue collected by U.S. Customs and Border Protection is deposited into the U.S. Treasury's general fund. This money is not earmarked for a specific program but becomes part of the government’s overall revenue, which can be used for federal spending, such as infrastructure, defense, or social programs.

Example

U.S. Flour Co. purchases wheat from Canada Wheat Co. for $1 million. The U.S. government imposes a 25% tariff on all Canadian wheat imports. As a result, U.S. Flour Co. must pay an additional $250,000 in tariff duties to U.S. Customs and Border Protection before the wheat can clear customs. This increases the total cost of the imported wheat to $1.25 million, which U.S. Flour Co. may either absorb or pass on to consumers through higher prices.

What is the Purpose of Tariffs?

The U.S. imposes tariffs for several key reasons, each serving different economic, political, and strategic objectives. These include:

1. Protecting Domestic Industries

Tariffs make imported goods more expensive, helping domestic producers compete with foreign competitors. This protection is particularly useful in industries where lower-cost imports might otherwise drive U.S. companies out of business.

2. Generating Government Revenue

Historically, tariffs were a primary source of federal revenue before the income tax was established. While less significant today, tariff revenues still contribute to the U.S. Treasury’s general fund and help finance government operations.

3. Addressing Trade Imbalances

By making imports more expensive, tariffs can reduce reliance on foreign goods and encourage domestic production. This can help address trade deficits by limiting the amount of money flowing out of the U.S. to pay for imports.

4. Retaliating Against Unfair Trade Practices

Tariffs are often used as a tool to respond to unfair trade practices, such as subsidies, dumping (selling goods below market value), or intellectual property theft by foreign nations.

5. Protecting National Security

Certain tariffs are imposed to safeguard industries critical to national security, such as steel, aluminum, and semiconductor manufacturing.

6. Strengthening Foreign Policy and Diplomacy

Tariffs can be used as a foreign policy tool to pressure other countries into trade negotiations or compliance with international agreements. They can also serve as leverage in broader geopolitical strategies.

What is the Legal Authority to Impose Tariffs?

The power to impose tariffs in the United States originates from the U.S. Constitution. Specifically, Article I, Section 8, Clause 1 grants Congress the authority "to lay and collect Taxes, Duties, Imposts and Excises." Additionally, Clause 3 of the same section, known as the Commerce Clause, gives Congress the power to "regulate Commerce with foreign Nations."

While Congress has the constitutional authority to impose tariffs, it has delegated much of this power to the executive branch through legislation. Several key laws provide the legal foundation for U.S. tariff policy:

• The Tariff Act of 1930 (Smoot-Hawley Tariff Act) – This law, originally designed to protect American industries during the Great Depression, set high tariff rates on many imported goods. Although many of its tariffs have been reduced over time, the law remains a foundation for U.S. trade policy.
• Section 232 of the Trade Expansion Act of 1962 – This law allows the President to impose tariffs on imports that threaten national security.
• The Trade Act of 1974 – This legislation provides the President with the ability to negotiate trade agreements and adjust tariffs, particularly in cases involving unfair trade practices by foreign nations.

So, while the authority to impose tariffs is exclusive to Congress in the Constitution, Congress has ceded at least some of its power to the President.  

Conclusion

Tariffs play a significant role in U.S. trade policy, serving as tools for economic protection, revenue generation, and international diplomacy. While they can shield domestic industries and address unfair trade practices, they also have broader consequences, such as higher consumer prices and potential trade disputes. Understanding the legal framework behind tariffs helps clarify how and why they are implemented.

As we continue our Principles of Government series, we will explore more fundamental legal concepts that shape national and global policy, providing you with the knowledge to assess their impacts for yourself.