William Spahn | Spring 2025
What actually is a tariff? Millions of Americans asked themselves that same question in the runup to the 2024 Presidential election. In recent years, there has been much debate about U.S. trade policy and tariff policy in particular. According to Google Search trends, the topic “Tariff” surged by a factor of nearly eight in mid-November compared to early October 2024, and reached a record high in searches in early February after the President’s announcement of increased tariffs on Mexico, Canada, and China (Google 2025).
At their core, tariffs are a tax on U.S. imports, burdening both producers and consumers. While importing firms are the ones who actually pay the tariff to the government, in order to sell their goods in the U.S., they can pass much of the price increase onto the consumer by raising the prices at which their products are sold. Government revenue from the tax will largely be dependent on how effective it is at reducing imports. If consumers bear a higher portion of the burden and reduce consumption as a result, the tax will earn less revenue. If producers let the tax eat into their own revenue and lessen the burden on consumers, then consumption will fall less dramatically and lead to higher revenue from the tax since demand won’t fall as much.
Tariffs can often be compared with sales taxes. Now, tariffs are different from a sales tax in several ways. For one, consumers can try to avoid the tax by substituting domestic products in place of imported ones. However, increased demand for domestic products over time will increase the price to effectively match the post-tax price level of the imported product. Given time, market forces push the prices of both domestic and taxed imports to an equilibrium—an effect known as the law of one price. This equilibrium is often between the original prices of the domestic and tariffed products. Unlike goods targeted by an across the board sales tax, U.S. imports are affected not just by the price of the goods (which is affected by tariffs), but also the price of the foreign currency relative to the U.S. dollar. If demand for foreign products in the United States declines, so too will the price of the foreign currency relative to the U.S. dollar. On the other hand, this will cause the U.S. dollar to appreciate or gain value relative to the foreign currency, and increase the purchasing power of the American consumer. It’s important to note that the “depreciation” of the foreign currency will reduce the effectiveness of the tariff by offsetting some of the price increases, but not all of it (Yale University 2025). Moreover, a stronger dollar will make U.S. exports more expensive and less attractive in foreign markets, hurting U.S. exporters.
Economists are generally opposed to the use of tariffs in trade policy (Furceri et al. 2020). Tariffs are rarely one-sided; often, countries will impose retaliatory tariffs aimed at hurting consumers in the other country more than they are. This can result in a cycle of increasing tariffs and other economic measures to weaken the economy of another nation: a trade war. When tariffs are imposed on goods, they disrupt the previous equilibrium determined through voluntary exchange, meaning that consumers are often worse off due to higher prices. Foreign firms also experience a decline in sales revenues. Domestic firms, however, in import-competing sectors benefit from trade protectionism as they enjoy greater market power, allowing them to charge higher prices and have higher profits even in the absence of retaliation. Given that there are more consumers than producers, this could still be considered a net loss. Nonetheless, It may be in some cases that there are externalities that render tariffs worthwhile in order to achieve certain national interests.
Since its inception, the United States has sought to protect its domestic manufacturing industry. Tariffs had long been a key part of policy efforts aimed at boosting U.S. domestic manufacturing throughout the 19th and early 20th centuries, yet the post-war era was dominated by proponents of free trade, generally opposed to unnecessary tariffs. In the aftermath of the 2008 recession and NAFTA, the debate over protecting the U.S. manufacturing industry has been revived. It’s unclear though how new tariffs may impact manufacturing in the 21st century. Even past results were mixed. From 1870 to 1909, the United States maintained high tariffs on manufactured goods that were successful at increasing overall manufacturing output, value added, and employment, yet labor productivity declined during the same period as a result (Klein and Meissner 2025). In the last decade, the U.S. has started to revisit previous tariff policy as a means of incentivizing firms to manufacture products in the United States as opposed to offshoring jobs. Subsidies for firms producing domestically were introduced in 2022 as an alternative to increasing tariffs already in place, intending to onshore manufacturing jobs (Blevins et al. 2023). Unlike in the 19th century, the manufacturing sector faces the impact of labor-replacing technologies and artificial intelligence, complicating any prediction of the effects of new or increased tariffs on manufacturing employment and the sector at large.
Tariffs aren’t solely imposed on final goods and services, in fact, the United States has maintained 25% steel import tariffs since 2018 (Bond et al. 2025). Due to its common role as an intermediate good, steel prices can significantly impact the prices of its subsequent utilities in manufacturing and construction. For this same reason, the U.S. government had an interest in protecting the industry in case of war or national catastrophe that would hinder access to foreign steel. Steel is an important component in motor vehicle assembly. Just as the price of motor vehicles can increase if a tariff were to be imposed on them, a tariff on one of its components can have the same effect.
Oil is an input required for not only energy production, but many products sold in the United States. In 2024, the United States imported an average of over four million barrels of crude oil every day from Canada (Reuters 2025). Since it must be refined before being used for an expansive array of applications, fluctuation in crude oil prices could significantly impact the U.S. economy. Now, even as tariffs on Canadian energy imports are being considered, it’s impossible to know the exact effect they might have on the U.S. economy. Consumer behavior, trade retaliation, and the U.S. dollar foreign exchange rates are just a few of the many factors changing by the day, shaping the function and role of tariffs in U.S. economic policy.
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Blevins, Emily, Alice Grossman, and Karen Sutter. Frequently asked questions: Chips act of 2022 provisions and implementation | congress.gov | Library of Congress, April 5, 2023.
Bond, David, Gregory Spak, William Moran, Samuel Scoles, Matt Soloman, and Ian Saccomanno. “President Trump Expands Steel and Aluminum Tariffs to All Countries; Effective March 12, 2025.” White & Case LLP, February 17, 2025.
Furceri, Davide, Swarnali A Hannan, Jonathan D Ostry, and Andrew K Rose. “Are Tariffs Bad for Growth? Yes, Say Five Decades of Data from 150 Countries.” Journal of policy modeling, April 12, 2020.
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Klein, Alexander, and Christopher Meissner. “Working Papers.” NBER, February 2025.
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