Tariffs 101: History of revenue, protectionism

URBANA, Ill. — The notion of tariffs dates back to the first major law passed by the U.S. Congress in 1789 and has evolved over time.

The law states “it is necessary for the support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufacturers, that duties be laid on goods, wares and merchandise imported.”

There was no federal income tax at the time, and the government used the tariffs to pay off the U.S. war debt.

The Tariff Act of 1789 levied a 50-cent per ton duty on goods imported by foreign ships, and American-owned vessels were charged 6 cents per ton.

As is the case today, there were disagreements. Alexander Hamilton looked at tariffs as a revenue source and James Madison believed tariffs could lead to trade reciprocity with Great Britain and other nations, according to Scott Bomboy, National Constitution Center editor-in-chief.

Craig Lemoine, Agricultural and Consumer Economics Financial Planning Program director and associate clinical professor at the University of Illinois at Urbana-Champaign, broke down the complex world of tariffs in a farmdoc video.

“A tariff, simply put, is a tax on imports. For example, let’s say a homebuilder in Wisconsin imports lumber from Canada. If we put a 25% tariff on that lumber and that importer buys $100 of lumber, he cuts a check for $25 to the government as a tax. That lumber now costs the importer $125 instead of $100,” Lemoine said.

“That importer sells that lumber or they build a house, they’re going to have to reflect that increased tax they paid the government in the cost of those materials.”

From an economic standpoint, tariffs can be used to raise revenue for the federal government or protectionism.

“Either way is the idea that if we raise the cost of goods from outside the United States, perhaps we’re more likely to use goods generated inside the United States,” Lemoine said.

He recalled what he saw while growing up in El Paso, Texas, after passage of the North American Free Trade Agreement.

“You saw a bunch of textile companies like Levy”s and companies that made blue jeans pop up on the border of Mexico and the United States. The idea being that you would have American and Mexican management and you would typically have employees from Juarez, Mexico. They would make the textiles and the textiles were then shipped to the United States,” he said.

“It was a way that they could make textiles without paying United States labor costs, which typically are more expensive than labor costs in Juarez, Mexico, would be. So, the idea of a tariff then kind of flies in the face of that free trade.”

Focus Changed

In general, tariffs in recent history are focused on a particular country and not necessarily by industry.

“There’s some industries in the United States that do a very good job and maybe we have a domestic interest in that industry continuing such as making cars in the United States,” Lemoine said.

“Our ability to produce cars is the same as our ability to produce and weaponize those kinds of things if we ever needed to.

“So, yes, you can make the argument that we need a strong, healthy car industry in the United States. Maybe if we put tariffs on automobiles or automobile parts, we would then see perhaps more people buying U.S. cars because they would be priced more affordably or cheaper than international alternatives.

“You could make an argument that perhaps if you’re a big believer in bourbon, we put a big tax on tequila. Tequila is generally made in Mexico and south of there, and what was $100 a bottle is now $100 plus that tariff tax put on it.

“So, summarize a little about tariffs, the reason that we use tariffs might be to raise funds. It might be to protect American jobs, to grow American industries, and we can look at that from the slant that, OK, maybe that’ll work.

“The danger in tariffs is that there are local economies and synergy economics and a real global economy that when we start to introduce tariffs becomes significantly less efficient and has different middlemen and different costs and fees and structure that weren’t there in the past.”