The term “tariff” itself comes from the French word “tarif,” which is derived from the Italian “tariffa,” meaning a schedule of taxes or customs 1. Historically, tariffs were used by various empires and kingdoms to control trade and generate income.
This post digs into tariffs and shares what we need to understand about them to form an educated opinion on what’s happening today. Let’s start with a few definitions:
Tariff = a tax, also called a duty, imposed by a government on imported or exported goods. Tariffs are used to regulate trade between countries, protect domestic industries from foreign competition, and generate revenue for the government.
Protectionist = a strategic position that seeks to protect a country’s businesses from external market pressure by implementing measures such as tariffs, quotas, and subsidies to restrict imports and promote local production.
Free Trade = the elimination of barriers to international trade, such as tariffs, quotas, and subsidies. The goal is to allow goods and services to move freely across borders, promoting economic efficiency and growth.
The first recorded case of a tariff being used was around 1900BC in an Assyrian trade colony of Kanesh, which is located in modern-day Turkey. Merchants trading precious metals and other goods between Kanesh and Assyria were subject to taxes imposed by local rulers.
Tariffs in American History
Looking back over US history, we can see shifts in U.S. trade policy in response to changes in national events, economic conditions, political ideologies, and global developments.
The first significant tariff legislation was the Tariff Act of 1789, which was among the first acts signed into law by the first Congress. This act did two things:
- Added a duty (tax) on the import of various goods
- Added a duty on imported goods that were not shipped to the US on an American-owned shipped
The goal of these new import taxes was to raise funds for the new nation and to protect American businesses from foreign competition by making imported goods more expensive than competing goods from American companies, thus driving down the demand for them.
What was America like in 1789?
In 1789, the US had a population of about 3.9 million people, most of whom worked in farming, fishing, and logging. The primary products that the US exported to Europe were tobacco, wheat, corn, rice, fish, and timber.
The primary goods being imported into the US at that time came from Europe:
- Great Britain – As the former colonial ruler, Britain was a significant source of manufactured goods, textiles, and other products.
- France – France provided luxury items, wines, and various manufactured goods.
- Spain – Spain was a source of goods such as wines, olive oil, and other Mediterranean products.
- Netherlands – The Dutch supplied a variety of goods, including textiles and spices.
We also got a few things from the West Indies including sugar, rum, and other tropical products. Less commonly imported at that time were tea and porcelain from China.
The 1789 Tariff Act was followed up by more tariff-related legislation:
- The Tariff of 1816: This was the first protective tariff in the U.S., designed to shield American manufacturers from British competition after the War of 1812.
- Tariff of 1828 (Tariff of Abominations): Highly controversial, it aimed to protect Northern industries but was strongly opposed by the South.
- The Morrill Tariff of 1861: Implemented to protect American manufacturers and generate revenue for the Union during the Civil War.
Early 20th Century Tariffs
- Fordney-McCumber Tariff of 1922: Raised tariffs to protect American businesses and farmers after World War 1.
- Smoot-Hawley Tariff of 1930: Increased tariffs on thousands of imported goods, contributing to the global economic downturn during the Great Depression.
It’s worth noting that the last time the US substantially increased tariffs across the board was in 1930 which is thought to have contributed to the Great Depression. Wikipedia has a really good article covering it so head over there to read the details about it. My big takeaway is the similarities to what’s going on today like wealth inequality.
Mid to Late 20th Century Tariffs
- Trade Expansion Act of 1962: Authorized the president to negotiate tariff reductions and aimed to promote international trade.
- Trade Act of 1974: Established the framework for modern trade policy, including the Generalized System of Preferences (GSP) to promote trade with developing countries.
21st Century Tariffs
- Tariff Act of 2018: Part of the trade policies under the Trump administration, it imposed tariffs on steel and aluminum imports.
Presidents using Executive Orders to Implement Tariffs
Fast forward to 2025 and we have the current president using executive order to implement tariffs as an issue of national security. A president using executive order for tariffs is not new to President Trump.
Section 232 Tariffs (1960s – Present) – Section 232 of the Trade Expansion Act of 1962 gives the president authority to impose tariffs or trade restrictions if imports threaten national security. Presidents have used this provision to implement tariffs on various goods:
- In 1962, President John F. Kennedy imposed tariffs on steel imports under Section 232.
- In 1986, President Ronald Reagan imposed tariffs on Japanese electronics and other imports using Section 232.
- In 2018, President Donald Trump invoked Section 232 to impose tariffs on steel (25%) and aluminum (10%) imports from various countries, including allies like Canada and the European Union. This decision led to trade disputes and retaliatory tariffs.
Over the years, presidents have used various executive orders to apply tariffs as remedies to trade imbalances or to protect specific domestic industries. These include Section 201 of the Trade Act of 1974, which allows the president to impose safeguard tariffs on imported goods that harm domestic industries. For example, in 2002, President George W. Bush imposed steel tariffs under Section 201 to protect U.S. steel producers.
While Congress retains the authority to set tariffs, presidents have increasingly used executive orders and executive powers granted by trade laws to impose or adjust tariffs, especially in the context of national security concerns or trade imbalances.
How tariffs impact the price of goods
To a business, a tariff represents another cost to produce and bring a product to market which will get passed on to consumers in the purchase price. A simple example would be a refrigerator from LG or Samsung, both South Korean companies, that sold last year for $650 will now have to sell for $813 if the proposed 25% tariff stands.
In the pre-globalization era of the US when we made everything in house, US companies would not be impacted by these tariffs. This is not the case today. Even if we buy an American-made product, it’s highly likely that at least some of the parts or raw materials used to make it or package it are imported from other places and subject to the increased tariffs.
Let’s take an example from a small business selling body butter. The product is made in America, but the raw materials and packaging come from other countries:
In this example, we see how each of the components that go into the creation of the product will cost more money with the increase in tariffs. Before, the businesses gross profit was $20.66 but with the new tariffs this is reduced to $18.54. The $2.12 difference may not seem like a big amount, but when you multiply this by thousands of units the impact can be felt.
I’m planning to post a few more posts in this series. If there’s something specifically you would like me to post about, let me know!
