The national discussion of tariffs has raised several complex questions about the process of international trade negotiations.
In basic terms, a tariff is a tax on the import of a good from another country, and is usually paid by the end user, according to Anne Villamil, Henry B. Tippie Research Fellow in Economics at the University of Iowa.
Tariffs can be a useful strategy in certain situations, as a tool to influence other countries’ trade policies, Ms. Villamil said.
“But I think the concern here is to negotiate first, rather than to impose tariffs first,” she said. “We’ve certainly gotten everyone’s attention, but we really need to get to negotiations. Tariffs reduce trade, and that’s a bad thing when you’re reducing commerce.”
In Iowa, the major impact of tariffs would come with two of the state’s largest sectors, manufacturing and agriculture, Ms. Villamil said, noting that one in five Iowa jobs is tied to agriculture, and tariffs would limit foreign markets for Iowa agricultural products.
Tariffs not only increase the cost of imports from other countries, but they also make it more expensive to sell products to those countries.
Aluminum is one material that stands to see a major tariff impact. The United States imports 80% of its aluminum from Canada, Ms. Villamil said, because Canada has an abundant supply of hydroelectric power, lowering the cost of buying aluminum for U.S. firms.
“Canada has what economists call a comparative advantage in producing aluminum,” Ms. Villamil said. “In layman’s terms, that means producing aluminum is energy intensive. Canada has a lot of hydroelectric power because of its geography, which gives it a comparative advantage in producing (aluminum) more cheaply, and then selling it other places, especially the United States. Because we are so close, we have a transportation system, we have a treaty which makes it advantageous to do so, and that lowers the cost of inputs for U.S. firms. We’re producing things here, but we’re getting key inputs [like aluminum] at lower costs, and that allows U.S. firms to offer better prices to people in the United States and around the world if these products are being exported. That’s a good thing.
“That’s the basic idea of trade, this idea of comparative advantage,” she added. “Some countries are better at doing certain things than other countries, and countries should specialize in producing the goods and services that they can produce at those lower costs.”
Tariffs can also be useful in strategic circumstances, Ms. Villamil said. There is substantial concern, for example, about China’s growth in military technology through lower-cost production of key components, such as Nvidia computer chips, that could threaten the United States and other countries.
“So in that case, we might want to consider tariffs for strategic and security reasons,” she said.
There are larger trade problems with China, regarding not only tariffs but also non-trade barriers imposed by the Chinese government to protect domestic industries, limiting the ability of companies from other countries, including the U.S., to sell goods and services competitively in China.
“China has had a long history of state-owned firms,” Ms. Villamil noted, “so if they do things like provide credit to their companies at favorable terms, no firm in the world can compete with that. In the United States and Europe, firms get loans on open markets, they pay market interest rates, and as we all know, interest rates have been high. If China chooses to directly subsidize certain industries, that makes it difficult for world counterparts to compete.”
But, Ms. Villamil stressed, the most constructive solution to trade issues with countries like China is through negotiations, including finding common ground with longtime trading partners like Canada, Mexico and the European Union — which is, in itself, a large economic entity that addresses mutual trade problems.
“Of course, we do have some bilateral trade issues with the European Union, a few with Canada, certainly with Mexico,” Ms. Villamil said. “But the trade agreement among the U.S., Canada and Mexico was renegotiated in 2018 under the Trump administration. So if we have specific concerns, we should renegotiate that agreement.”
Blanket tariffs are not the only framework the U.S. can employ in trade negotiations, Ms. Villamil said. The Trade Act of 1974, and related laws, provide guidelines for international trade.
Section 201, for example, offers safeguards to help domestic industries adjust to increased import competition, and it was used during the first Trump administration with supplies of washing machines and, in previous administrations, with solar panels.
Section 232 of the Trade Act allows tariffs for products deemed critical to national defense. Section 301 applies to unreasonable or discriminatory trade practices.
And Section 337 provides protections for unfair trade practices regarding intellectual property.
“That’s particularly important for the United States,” Ms. Villamil said, “because a lot of the focus recently has been on physical goods. But the U.S. is a world leader in services. Think about things like insurance, financial services, entertainment, education. When foreign students are coming to the U.S., that is us exporting its education. So these are provisions on issues that affect patent disputes, tech industries, insurance, things of that nature.”
The World Trade Organization, and its associated global treaty, also serves to govern international commerce, offering a mechanism countries are expected to use to peacefully resolve trade disputes.
“Clearly, that is not working,” Ms. Villamil said, “but we need to build or modify these types of institutions so that they are effective in solving these problems, because we all gain from trade done well. Shrinking markets, which is what this deglobalization is about, is not what we want to do. Most economists will tell you that it’s not just the tariffs. We are now in an actual trade war, which is economically destructive.”
Tariffs can be politically appealing, Ms. Villamil said, because people like the alleged idea that other countries will pay for tariffs and the U.S will gain revenue as a result.
“This is largely not true,” she said. “Economists call this the ‘incidence of the tax.’ That is who is actually going to pay the tax. And it’s well-established that the incidence of the tax generally falls on purchasers — in other words, consumers of final goods.”
International trade issues are common and predictable, Ms. Villamil said, but it’s also generally not advisable to have top elected officials, such as presidents, working directly to solve those issues.
“These issues come up because countries have different interests,” she said, “but we have fixed such problems in the past, and we need to do those negotiations. China is a separate issue. China has indicated that it would like to have negotiations, but it wants to know who the point person is, and the president of the United States simply cannot unilaterally negotiate all of these trade agreements as part of the executive office. The U.S. Trade Representative’s Office is the entity that usually handles all of these trade negotiations, and we’re hearing nothing about that. That is the working level at which you sit around a conference table and hash out the issues, and then those issues are brought back to respective governments for guidance and agreement or disagreement. We are not seeing any of that. Of course, the president’s office provides advice and guidance on what should happen, but typically heads of state get involved at the end of the process, not on X.
“The president posts something on social media and says, ‘I am imposing this tariff on this country,’” she added. “This is just not a helpful way to do policy. It creates tremendous policy uncertainty, and that creates problems for U.S. firms, for U.S. investors, for U.S. consumers, as well as for people all around the world. This is why we’re seeing these high volatility figures in markets, and this is not constructive for economic growth.”
Ms. Villamil said she’s not entirely sure about the purpose of the tariffs, as they’re currently being pursued.
“Sometimes they appear to be punitive,” she said. “Sometimes they appear to be revenue-raising measures, and the goal is to get tariffs down so that we expand international markets. If that’s the goal, we’re certainly not going to raise revenue.”
If countries are at an impasse in trade negotiations, they do have the right to impose countermeasures, such as tariffs, under the WTO, Ms. Villamil said.
“You can have tariffs, you can have quotas, you can have voluntary export restraints,” she said. “There’s a whole list of things that countries can do under the auspices of world trade agreements. But this presumes that negotiations have come first, and they have not.”
History can provide some lessons on large-scale tariffs. The Smoot-Hawley Tariff Act of 1930 imposed substantial tariffs on goods imported into the U.S. as a means of protecting American industries as the Great Depression took hold.
However, other nations imposed retaliatory tariffs of their own, leading to a significant decline in international trade and exacerbating the U.S. economic downturn. The Smoot-Hawley tariffs are now generally considered to be a major economic policy failure.
“One of the things we saw from Smoot-Hawley was, ‘we’re just going to put tariffs on a few products. This is going to be limited. This is going to be over quickly,’” Ms. Villamil said. “It was also the expectation of the United States that other countries would not retaliate. Most did, and this is a standard thing to do. Again, this is why we want to get to negotiations.”
Historically, the focus of international trade agreements has been to grow the world economy, Ms. Villamil said — not just to grow domestic markets for the U.S. economy, but to create larger world markets for U.S. exports.
“The president is right about that,” Ms. Villamil said. “Having access to other countries’ markets is very important. But what people often don’t understand about trade is that it’s a positive sum game. That means it’s all about growing the pie, not having a fixed pie and arguing as much over the slices — because if the pie is growing, everybody, in principle, can get a bigger slice.
“Trade wars are so disruptive because they shrink the pie,” she added. “And this is self-inflicted. Most economists say we know that this is a bad strategy. We want to grow the pie, not shrink it, which is what a trade war does. The appropriate people need to get around negotiating tables so that we can get a path back to certainty in the economy. The current level of high uncertainty and high volatility is very destructive for investment and growth.”
