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On January 22, 2018, President Donald Trump approved more than $10 billion in tariffs on solar panels and washing machines imported from China. According to the Peterson Institute for International Economics, the historically rare move marked the start of a protectionist trade policy that Trump had placed at the heart of his campaign.
China responded by imposing tariffs on sorghum imported from America. In March, Trump announced new tariffs on imported steel and aluminum. In April, China issued retaliatory tariffs on fruits, nuts, pork and other US imports.
A trade war had begun.
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Most Americans probably don’t spend much time worrying about Chinese steel, American sorghum, and foreign trade politics. Even so, the global tit-for-tat has affected ordinary people and their budgets. Here’s how international trade tariffs and politics affect your life, your family and your bank account.
Customs duties are taxes levied on goods imported from other countries. According to the Brookings Institution, tariffs were once a key source of government revenue, but in an age of global economy, the government uses tariffs primarily to protect specific industries from foreign competition.
For example, when tariffs raise the price of Chinese washing machines, American consumers are more likely to buy cheaper domestic washing machines.
In 1930, Congress passed the Smoot-Hawley Tariff Act to protect struggling American farms and businesses during the Great Depression. The law, which raised about 900 import tariffs, had exactly the opposite effect, according to the Corporate Finance Institute. In response, other countries passed tariffs on American goods, which stifled global trade and forced a 65% reduction in international trade, only deepening the depression.
The United States changed its protectionist trade policies and moved to a hands-off approach that favored free trade over tariffs and other barriers. This era lasted from the end of World War II to the Trump presidency.
According to Brookings, US revenue from tariffs held steady at around $20 billion from the early 1990s to the early 2000s. Customs revenues hovered around $30 billion from the late 2000s to the early 2010s and never reached $40 billion – until Trump declared a trade war on China and the world.
In 2018, tariff revenue jumped to more than $50 billion, and then to $79 billion in 2019, more than double revenue from just two years earlier.
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Despite Trump’s claims that foreign companies were footing the bill for the trade war, “the cost of the tariffs has been borne almost entirely by American households and American businesses, not by foreign exporters,” according to Brookings. Institution, a non-profit and non-partisan organization, which has long been referenced by conservative and liberal policy makers.
Brookings cited several studies suggesting that the average American household was paying hundreds or even thousands of dollars more per year for consumer goods that the trade war had made more expensive.
The Tax Foundation — a nonprofit, nonpartisan organization that leans toward the center-right — has analyzed the economic impact of Trump’s tariffs. He concluded that the nearly $80 billion in revenue the government collected from American consumers and businesses as a direct result of the tariffs amounted to one of the largest tax increases in American history in terms of percentage of GDP.
Changes in trade policy almost always favor one group over another. The New York Times reported that Trump’s tariffs on steel and washing machines created thousands of jobs in the steel industry and about 1,800 jobs at LG, Whirlpool and Samsung.
However, Federal Reserve data shows that those gains were more than offset by losses suffered by U.S. manufacturers who depend on imported raw materials, which have been made more expensive by retaliatory tariffs. Additionally, US companies that sell goods overseas have been harmed by retaliatory limits on US exports and a decline in demand for US goods.
In the days of Smoot-Hawley, imposing tariffs was a much simpler affair.
American cars, for example, were American. Today, American workers in Alabama and Tennessee assemble Japanese cars made from Chinese steel and semiconductors from South Korea or the Netherlands.
While protective trade policies can bring rogue nations to the negotiating table, it is nearly impossible to punish countries with tariffs without incurring self-inflicted injuries.
Trade policy can also be part of diplomatic efforts. For example, President Joe Biden temporarily lifted tariffs on Ukrainian steel after the Russian invasion. The downside is that countries prefer trading partners with predictable and consistent policies – frequent changes and arbitrary tariffs can make any country a less desirable place to do business.
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