- by Anna Pha
- The Guardian
- Issue #2141
Photo: pexels.com (CC0)
A tariff is simply a tax imposed by a government on goods or services imported from another country. It is paid to the government by the company that is doing the importing.
Tariffs are usually calculated as a percentage of the price paid by the importer to the seller (exporter). The importer almost always passes on the tariff to its consumers making the import more expensive and less competitive compared to locally made products. This can have an inflationary effect on the economy.
Governments use tariffs to protect domestic industries (protectionism) by making imports more expensive and less competitive. They can be used to reduce a trade deficit where imports outstrip exports or raise revenue for a government.
The US had a whopping trade deficit of US $1.2 trillion (AU$2.33tr) in 2024 and rising. President Trump is aiming to reduce the trade deficit as well as raise money with reducing taxes in mind.
It’s not that simple. If countries retaliate with their own tariffs, US exports may fall, countering the impact of the tariffs imposed by the US. Governments in the EU, China, and elsewhere are retaliating with their own tariffs.
HISTORICAL ROLE US TARIFFS
Historically, the US relied exclusively on tariffs to finance its government, a practice dominant in the 18th and 19th centuries when income taxes were non-existent. Before the 16th Amendment in 1913 granting the government the right to issue a tax, tariffs funded federal operations – roads, defence, and administration – without taxing individual earnings, a system Trump’s tariff-heavy approach partially revives to support economic objectives. This reduces reliance on creditors like China, which holds a substantial share of US debt.
Trump claims the tariffs being imposed are “reciprocal” implying the countries on the receiving end of his tariffs already apply similar tariffs to the US. But there is some creative arithmetic in how the tariff rates are calculated.
For example, Trump accuses Australia of already charging the US 10 per cent tariff on all imports from the US. That is nonsense. He is referring to the GST which is not a tariff but is applied equally to goods and services regardless of whether they are imports.
Under the Free Trade Agreement between the two countries, Australia does not charge tariffs on imports from the USA
FORGET FACTS
Trump used a simple formula: The size of the US trade deficit with each country divided by the size of US imports from that country, divided by two.
For example: The US runs a US$123bn deficit with Vietnam. It imports US$137bn. So it is deemed to have trade barriers equating to a 90% (123 = 90) tariff. This is rubbish, but facts don’t count for Trump. This is divided by two to give a “reciprocal” tariff of 45%. As someone said, it makes as much sense as basing your tax rate on the number of vowels in your name.
In the case of China, the US exported only US $143.5 billion worth of goods to China in 2024, but it imported $US438.9 billion. Using the formula, China is treated as imposing a 67% “tariff” on US goods. Trump then halved it to obtain a “reciprocal” tariff rate of 34%.
He then added the 34% to the pre-existing 20% to hit China with a 54% tariff. China has retaliated with a 54% tariff and a ban on some exports to the US.
If that trade deficit/import ratio with another country is less than 10 per cent, or if the US has a trade surplus with a country, a flat tariff of 10% is applied, as is the case with Australia.
