Understanding Import Tariffs, Reasons for Imposing Them and Their Drawbacks

The increase in the import tariffs to be imposed by President Donald Trump for various countries around the world, including Indonesia, remains a hot topic. Especially when the target countries also promise to raise tariffs on imported goods from the United States.

Tariffs used to be the main way the United States collected tax revenue, but over time, elected leaders and economists have rejected it due to its many weaknesses.

If the new tariffs announced this week remain in place, according to Axios, the average tariff burden on America would be higher than any burden experienced by almost all humans still alive - higher than in the Smoot-Hawley era and roughly at 1909 levels.

That's why the market reacted very angrily to the president's announcement.

What Are Tariffs?

Tariffs are taxes imposed by the government on goods and services imported from other countries. When products cross the border of a country, the importing business pays this tax to the government of its home country, also known as customs duty. Tariffs are usually calculated as a percentage of the value of the goods, known as ad valorem tariffs.

In recent years, these taxes in the United States have been relatively low - dropping to 1.5 percent in 2017, after decades of bipartisan efforts to make global trade deals.

In his first term, President Trump then raised the tax to around 3 percent. This figure has largely been maintained by President Biden. The policies announced so far in Trump's current term have pushed the average tariff to 22.5 percent, according to the Yale Budget Lab.

Why Are Tariffs Imposed?

According to Axios, from the colonial era to the early 1900s, tariffs were the main source of federal government revenue. Import taxes were relatively easy to enforce even in an era before computers, Social Security numbers, and the like. When a ship arrived at the port, customs officers could inspect the goods, impose the appropriate tariff, and ensure tax compliance.

The Constitution limited the federal government's tax authority, so modern income taxes were not legally allowed until the 16th Amendment took effect in 1913.

Politicians sought to protect domestic industries from increasing European competition. (There is a similarity with how Japan and South Korea used protectionist policies in the second half of the 20th century to allow their countries to catch up from their world leaders).

There are various reasons tariffs are imposed on imported goods:

- Protecting Domestic Industries: By making imported goods more expensive, tariffs encourage consumers to buy locally made products, thus protecting domestic businesses from foreign competition.

- Generating Government Revenue: Tariffs provide a source of income for the government, especially in countries where other forms of taxation may be limited.

- Addressing Trade Imbalances: Tariffs can be used to improve trade deficits by preventing imports and encouraging exports.

Who Pays the Tariffs?

According to NDTV, importers pay tariffs when goods enter the country. However, the cost of the tax is ultimately passed on to consumers. Companies may absorb some of the cost, reducing their profits, but consumers often end up paying higher prices.

In turn, these imported goods become unable to compete with local products. In some cases, exporters lower prices to remain competitive. Over time, companies may move production to the U.S. to avoid tariffs. Importers may also request exemptions if no other suppliers are available.

How Are Tariffs Collected and Enforced in the United States?

U.S. Customs and Border Protection (CBP) enforces tariffs at nearly 330 points of entry, including border crossings, seaports, and airports. The Department of the Treasury oversees its regulations, but CBP handles collection, auditing, and penalties, as described by NDTV.

How are tariffs collected? Imported goods receive a numerical code under the International Harmonized System, which determines the tariff rate. Companies pay the tariffs at customs, and the funds go into the General Fund of the Department of the Treasury. If a company misrepresents product details, whether due to error or fraud, it may result in penalties.

What Are Reciprocal Tariffs?

Reciprocal tariffs are when one country matches the import tax (tariff) imposed by another country on its goods.

Simply put, if Country A imposes a 10 percent tariff on imports from Country B, then Country B responds by imposing the same 10 percent tariff on goods from Country A. The idea is to ensure fair and balanced trade between countries.

Some countries set tariffs based on trade deficits, not just corresponding tariffs. For example, the U.S. has considered higher tariffs on countries with large trade gaps, aiming to correct what it sees as unfair trade.

What Are the Drawbacks of Tariffs?

According to Axios, the reliance on tariffs has deep-seated issues, which is why their use has largely receded over the past century.

Tariffs harm the interests of U.S. farmers and other exporters, as other countries impose corresponding trade barriers. The tax burden disproportionately falls on low-income communities, which spend more of their money on basic needs than the wealthy.

They cannot raise enough money to fund a modern government, with a large military, social welfare programs like Social Security and Medicare, and the like.

In the heyday of tariff-centric America, they raised about 1.1 percent of GDP. Government spending is now about 23 percent of GDP.

Additionally, tariffs distort economic activity. Large U.S. industries spend more effort lobbying for special treatment through tariffs than building great products that can compete on the world stage.

When the world economy stumbled in the 1930s, countries rushed to impose tariffs in the hope of strengthening domestic industries, especially the Smoot-Hawley Act in the U.S. Mainstream economists saw this protectionist string as a crucial part of causing the episode to become the Great Depression.

Based on these lessons and as part of a broader effort to weave the economies of democratic countries together in the hope of ensuring lasting peace, the U.S. and other advanced countries spent the post-war era gradually eliminating tariffs and other trade barriers.

This effort was then thwarted by Trump by reintroducing high tariffs on imports.

Editor's Choice: Indonesia Assesses Impact of Trump's Import Tariffs, Sends High-Level Delegation to Washington D.C.

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