January 21, 2025 • 12 mins
Governments impose tariffs (which are border taxes paid by the importer) to help protect their nation's businesses from foreign competition. Learn how tariffs work, how they don't work, and why they can actually hurt local businesses and consumers in this episode of BrainStuff, based on these articles: https://money.howstuffworks.com/who-wins-loses-in-trade-war.htm; https://money.howstuffworks.com/who-wins-and-loses-if-us-imposes-steel-tariffs.htm
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to Brainstuff, a production of iHeartRadio, Hey brain Stuff
Lauren Vogelbaum. Here, the economics of international trade are notoriously sticky.
The World Trade Organization was formed for the express purpose
of getting countries to play nice when it comes to
the often dangerous and always intricate matters of global trade.
(00:25):
But what happens when politicians don't want to play nice?
Who actually wins and loses in a trade war? To
investigate this question, we have to talk about tariffs. A
tariff is basically a border tax levied on products coming
into a country based on things like the country of origin,
(00:45):
say China, or the type of product, say steel. When
the United States implements a tariff, it is the US
importer who pays the tax, not the foreign exporter. So,
for example, let's say the Trump administration orders a twenty
five percent tariff on Chinese steel. If an American company
(01:06):
wants to buy one million dollars worth of steel from China,
it would cost that American company one and a quarter million,
including Trump's tariff. The extra quarter of a million goes
to the American government, and again it is the American
importer that pays this increasing cost. Not the Chinese exporter.
The idea behind tariffs is that they should boost American business,
(01:30):
with the hopes that instead of paying that quarter of
a million dollar tax, American companies in need of steel
will buy from American producers, thus helping this hard hit industry,
which in turn will hire more workers to keep up
with the increased demand. And sounds like a win for
American business. But there's no guarantee that tariffs will play
(01:50):
out this way, because none of this happens in a vacuum.
Maybe Chinese steel is still less expensive than American steel
even with the tariff. Maybe American steel producers aren't equipped
to step up production fast enough to meet demand. If
American companies in need of steel decide it's easier, for
whatever reason, to just keep importing Chinese steel, consumer prices
(02:14):
will go up on everything that contains steel, like cars
or washing machines. That's because the cost of making those
goods will go up, and companies aren't going to just
eat the extra cost. They're going to pass it on
to the consumer that in turn can have further reaching
negative effects. Maybe consumers don't buy those products at all,
(02:36):
which is bad for the companies. If consumers do cough
up the dough for the higher price, they'll have less
money to spend elsewhere. That means other American companies could suffer,
which could cause a pullback in those industries, actually costing
American jobs overall. For the article, this episode is based
on how Stuff Works spoke back in twenty eighteen with
(02:58):
Charles Hankla, professor of political science at Georgia State University
in Atlanta. He said, what trade does in the aggregate.
It expands production, it expands jobs, it lowers prices. It
benefits countries in the aggregate, but it has distributional impacts.
What does he mean by that. Let's stick with the
(03:20):
example of steel. The American steel industry has been hurt
by the trade of less expensive steel coming in from
other countries. But the industries that use steel, those car
or washing machine manufacturers, have benefited because the price of
steel has gone down, and these days there's a lot
more Americans working in manufacturing than in production. Of course,
(03:44):
tariffs were not invented during the current political cycle. They're
a fact of international trading. The World Trade Organization provides
a forum for virtually all countries. It has on one
hundred and sixty four members to hammer out trade agreements.
The WTO got started just after World War II with
the General Agreement on Tariffs in Trade, and it implements
(04:07):
and monitors trade agreements, which includes what could be described
as tariffs or trade barriers or taxes negotiated by all parties.
Other agreements could be struck among nations too, like NAFTA
the North American Free Trade Agreement which covers the US, Canada,
and Mexico, but again those are deals that have to
(04:27):
be agreed upon by all parties. U S presidents normally
cannot impose tariffs without first going through the US International
Trade Commission, which is an independent, nonpartisan government agency that
was established in nineteen sixteen that researches international trade issues,
provides analysis to the President and Congress, and helps settle disputes. However,
(04:51):
the Trade Act of nineteen seventy four gave presidents power
to impose tariffs in response to matters of national security.
That's how Trump was able to push tariffs through in
his previous term, during which his administration hit China with
ten percent tariffs on two hundred billion dollars worth of imports,
then increased that to twenty five percent. These penalties affected
(05:14):
the prices that US consumers paid for scores of products
ranging from computers to luggage, and Chinese officials responded by
stepping up border inspections of US goods, holding up licenses
for US companies to do business in China, and adding
their own tariffs on US products. That kind of retaliation
the cansteiny business is common in a trade conflict. In
(05:39):
early January of twenty twenty five, Trump spoke about expanding
tariffs by declaring a national Economic emergency, instituting global tariffs
of as much as ten percent, a tariffs on Canadian
and Mexican products of up to twenty five percent, and
on Chinese products of up to sixty percent. Experts say
that that would invoke a different act, the Inner National
(06:00):
Emergency Economic Powers Act of nineteen seventy seven, though there's
argument about whether that act would actually legally allow the
Trump administration to do that, and furthermore about whether Trump
was even making a serious threat. But this is hardly
the first time that the US and other nations have
become involved in conflicts over trade. Trade wars can happen
(06:23):
for various reasons. It could be that one nation decides
it's getting a raw deal because another nation provides subsidies
to its manufacturers so they can export goods that are
priced too low to compete with. Or it could be
that a nation decides it wants to nurture its own
industries by hindering their foreign competitors with protective tariffs. Trump
(06:45):
has spoken extensively about wanting to lower the trade deficit
and bring back American manufacturing jobs. However, many economists don't
see the US trade deficit, which occurs when a country
imports more than an exports, as that big of a deal.
Some consider it necessary to the strength of the global economy,
(07:05):
and many economic experts say that reviving manufacturing in America
is a lost cause, that advancing technology is driving the
industrialization here, not bad trade deals. Centuries ago, trade wars
often involved actual violence. In the seventeen and early eighteen hundreds,
for example, China sold a lot of tea and porcelain
(07:29):
to the British Empire, so much so that the British
got worried about the outflow of silver to pay for it.
They decided to fix the trade imbalance by getting China
to import large quantities of opium that the British produced
in India. When the Chinese government eventually bulked at this arrangement,
the British sent in their warships and forced the Chinese
(07:50):
to sign the eighteen forty two Treaty that not only
opened up China to British trade, but gave the territory
of Hong Kong to the British. This conflict became known
as the First Opium War, and it's super complicated a
different episode, but even a bloodless trade war can cause
plenty of suffering. A lot of observers are seeing unsettling
(08:12):
parallels between Trump's multi front trade warfare and the trade
war that erupted in the nineteen thirties after President Herbert
Hoover signed into law the Smoot Holly Act, which raised
US tariffs by an average of sixteen percent. Other countries
enacted their own tariffs in response, leading to a disastrous
global decline in trade. Hastuffworks also spoke via email back
(08:36):
in twenty nineteen with Douglas A. Irwin, an economics professor
at Dartmouth College. He said Smoot Hawley was passed by
the House in the spring of nineteen twenty nine, before
the business cycle peak at a time when the economy
was doing well and the unemployment rate was low. However,
it got held up by the Senate, and by that
time the stock market had crashed in the fall of
(08:57):
nineteen twenty nine and the economy was moving into a recession,
which later became the Depression. The economy continued to get
worse after the passage of Smooth Holly, and the retaliation
against US exports that occurred because of it is thought
to have contributed to the severe economic difficulties at the time.
So there is a cautionary tale here. Just because the
economy is doing well and close to a peak does
(09:20):
not mean that things cannot go badly if one moves
in a protectionist direction. Smoot Hawlly also helped stimulate a
surge of angry nationalism in other countries. Irwin said, if
one country slaps tariffs on your goods, the usual response
is to take offense and retaliate, rather than to turn
the other cheap. Nationalists gain strength on perceived slights. And
(09:45):
just think about how China still remembers being humiliated by
Western powers during the Opium Wars of the nineteenth century,
and it's vow to never be so weak again, when
the Trump administration bullies countries today on trade, it naturally
leads other countries to stiffen their resild to resist the US.
Another big problem with trade wars is that, again, there
(10:06):
can be a lot of collateral damage. Poor people tend
to suffer disproportionately since basic necessities that they already struggle
to afford, like food, shoes, and transportation, can become more expensive,
and working class jobs can take a hit as well.
Let's continue with the example of steel, which the Trump
administration actually did impose tariffs on in twenty eighteen from Canada, Mexico,
(10:29):
and the European Union. Ast off Works spoke by email
in twenty nineteen with Philip I. Levy, who's now a
lead trade economist at the World Bank. He explained, if
you are in a steel using sector, like an autoparts manufacturer,
you are more likely to be hurt by the steel tariffs.
If you're in the construction sector, you're likely to be
(10:50):
hurt by terras on steel. These are hits to income
and employment, which are in addition to the hits people
take as consumers. To be fair, if you're a shareholder
US Steel, you're pretty happy you don't have to face
as much competition. True for workers as well, but much
of the job loss has been to automation, not trade,
so the tariffs don't fix that. The world economy and
(11:14):
global trade are stronger today than they were in the
early nineteen thirties, but a trade war today might be
even more damaging. Letty said, there's this unusual argument about
why this is a great time for a trade war.
It's a little like saying that today is a good
day for me to slam my hand in the car
door since I don't have to give a piano performance
in the near future. While that may be true, it's
(11:37):
still not a good idea to slam my hand in
a car door. He continued. Why might now be worse
than the nineteen thirties for the United States? Back then
everyone was doing it and we didn't really have global
supply chains. And now it is not the case that
all countries are raising trade barriers against everyone else. It's
the United States that is carving itself out of global
(12:00):
supply chains. All of that means that because most of
the rest of the world is still playing nice with
trade deals, American businesses could be uniquely disadvantaged by expanding
tariffs in the United States. Today's episode is based on
(12:21):
the articles who Wins and Loses in a Trade War?
Written by Patrick J. Higer and who Wins and Loses
If the US imposes Steel Tariffs written by John Donovan
on HowStuffWorks dot Com. Brain Stuff was production of iHeartRadio
in partnership with how Stuffworks dot Com and is produced
by Tyler Klang. Four more podcasts my heart Radio, visit
the iHeartRadio app, Apple Podcasts, or wherever you listen to
(12:42):
your favorite shows.
Welcome to Brainstuff, a production of iHeartRadio, Hey brain Stuff
Lauren Vogelbaum. Here, the economics of international trade are notoriously sticky.
The World Trade Organization was formed for the express purpose
of getting countries to play nice when it comes to
the often dangerous and always intricate matters of global trade.
(00:25):
But what happens when politicians don't want to play nice?
Who actually wins and loses in a trade war? To
investigate this question, we have to talk about tariffs. A
tariff is basically a border tax levied on products coming
into a country based on things like the country of origin,
(00:45):
say China, or the type of product, say steel. When
the United States implements a tariff, it is the US
importer who pays the tax, not the foreign exporter. So,
for example, let's say the Trump administration orders a twenty
five percent tariff on Chinese steel. If an American company
(01:06):
wants to buy one million dollars worth of steel from China,
it would cost that American company one and a quarter million,
including Trump's tariff. The extra quarter of a million goes
to the American government, and again it is the American
importer that pays this increasing cost. Not the Chinese exporter.
The idea behind tariffs is that they should boost American business,
(01:30):
with the hopes that instead of paying that quarter of
a million dollar tax, American companies in need of steel
will buy from American producers, thus helping this hard hit industry,
which in turn will hire more workers to keep up
with the increased demand. And sounds like a win for
American business. But there's no guarantee that tariffs will play
(01:50):
out this way, because none of this happens in a vacuum.
Maybe Chinese steel is still less expensive than American steel
even with the tariff. Maybe American steel producers aren't equipped
to step up production fast enough to meet demand. If
American companies in need of steel decide it's easier, for
whatever reason, to just keep importing Chinese steel, consumer prices
(02:14):
will go up on everything that contains steel, like cars
or washing machines. That's because the cost of making those
goods will go up, and companies aren't going to just
eat the extra cost. They're going to pass it on
to the consumer that in turn can have further reaching
negative effects. Maybe consumers don't buy those products at all,
(02:36):
which is bad for the companies. If consumers do cough
up the dough for the higher price, they'll have less
money to spend elsewhere. That means other American companies could suffer,
which could cause a pullback in those industries, actually costing
American jobs overall. For the article, this episode is based
on how Stuff Works spoke back in twenty eighteen with
(02:58):
Charles Hankla, professor of political science at Georgia State University
in Atlanta. He said, what trade does in the aggregate.
It expands production, it expands jobs, it lowers prices. It
benefits countries in the aggregate, but it has distributional impacts.
What does he mean by that. Let's stick with the
(03:20):
example of steel. The American steel industry has been hurt
by the trade of less expensive steel coming in from
other countries. But the industries that use steel, those car
or washing machine manufacturers, have benefited because the price of
steel has gone down, and these days there's a lot
more Americans working in manufacturing than in production. Of course,
(03:44):
tariffs were not invented during the current political cycle. They're
a fact of international trading. The World Trade Organization provides
a forum for virtually all countries. It has on one
hundred and sixty four members to hammer out trade agreements.
The WTO got started just after World War II with
the General Agreement on Tariffs in Trade, and it implements
(04:07):
and monitors trade agreements, which includes what could be described
as tariffs or trade barriers or taxes negotiated by all parties.
Other agreements could be struck among nations too, like NAFTA
the North American Free Trade Agreement which covers the US, Canada,
and Mexico, but again those are deals that have to
(04:27):
be agreed upon by all parties. U S presidents normally
cannot impose tariffs without first going through the US International
Trade Commission, which is an independent, nonpartisan government agency that
was established in nineteen sixteen that researches international trade issues,
provides analysis to the President and Congress, and helps settle disputes. However,
(04:51):
the Trade Act of nineteen seventy four gave presidents power
to impose tariffs in response to matters of national security.
That's how Trump was able to push tariffs through in
his previous term, during which his administration hit China with
ten percent tariffs on two hundred billion dollars worth of imports,
then increased that to twenty five percent. These penalties affected
(05:14):
the prices that US consumers paid for scores of products
ranging from computers to luggage, and Chinese officials responded by
stepping up border inspections of US goods, holding up licenses
for US companies to do business in China, and adding
their own tariffs on US products. That kind of retaliation
the cansteiny business is common in a trade conflict. In
(05:39):
early January of twenty twenty five, Trump spoke about expanding
tariffs by declaring a national Economic emergency, instituting global tariffs
of as much as ten percent, a tariffs on Canadian
and Mexican products of up to twenty five percent, and
on Chinese products of up to sixty percent. Experts say
that that would invoke a different act, the Inner National
(06:00):
Emergency Economic Powers Act of nineteen seventy seven, though there's
argument about whether that act would actually legally allow the
Trump administration to do that, and furthermore about whether Trump
was even making a serious threat. But this is hardly
the first time that the US and other nations have
become involved in conflicts over trade. Trade wars can happen
(06:23):
for various reasons. It could be that one nation decides
it's getting a raw deal because another nation provides subsidies
to its manufacturers so they can export goods that are
priced too low to compete with. Or it could be
that a nation decides it wants to nurture its own
industries by hindering their foreign competitors with protective tariffs. Trump
(06:45):
has spoken extensively about wanting to lower the trade deficit
and bring back American manufacturing jobs. However, many economists don't
see the US trade deficit, which occurs when a country
imports more than an exports, as that big of a deal.
Some consider it necessary to the strength of the global economy,
(07:05):
and many economic experts say that reviving manufacturing in America
is a lost cause, that advancing technology is driving the
industrialization here, not bad trade deals. Centuries ago, trade wars
often involved actual violence. In the seventeen and early eighteen hundreds,
for example, China sold a lot of tea and porcelain
(07:29):
to the British Empire, so much so that the British
got worried about the outflow of silver to pay for it.
They decided to fix the trade imbalance by getting China
to import large quantities of opium that the British produced
in India. When the Chinese government eventually bulked at this arrangement,
the British sent in their warships and forced the Chinese
(07:50):
to sign the eighteen forty two Treaty that not only
opened up China to British trade, but gave the territory
of Hong Kong to the British. This conflict became known
as the First Opium War, and it's super complicated a
different episode, but even a bloodless trade war can cause
plenty of suffering. A lot of observers are seeing unsettling
(08:12):
parallels between Trump's multi front trade warfare and the trade
war that erupted in the nineteen thirties after President Herbert
Hoover signed into law the Smoot Holly Act, which raised
US tariffs by an average of sixteen percent. Other countries
enacted their own tariffs in response, leading to a disastrous
global decline in trade. Hastuffworks also spoke via email back
(08:36):
in twenty nineteen with Douglas A. Irwin, an economics professor
at Dartmouth College. He said Smoot Hawley was passed by
the House in the spring of nineteen twenty nine, before
the business cycle peak at a time when the economy
was doing well and the unemployment rate was low. However,
it got held up by the Senate, and by that
time the stock market had crashed in the fall of
(08:57):
nineteen twenty nine and the economy was moving into a recession,
which later became the Depression. The economy continued to get
worse after the passage of Smooth Holly, and the retaliation
against US exports that occurred because of it is thought
to have contributed to the severe economic difficulties at the time.
So there is a cautionary tale here. Just because the
economy is doing well and close to a peak does
(09:20):
not mean that things cannot go badly if one moves
in a protectionist direction. Smoot Hawlly also helped stimulate a
surge of angry nationalism in other countries. Irwin said, if
one country slaps tariffs on your goods, the usual response
is to take offense and retaliate, rather than to turn
the other cheap. Nationalists gain strength on perceived slights. And
(09:45):
just think about how China still remembers being humiliated by
Western powers during the Opium Wars of the nineteenth century,
and it's vow to never be so weak again, when
the Trump administration bullies countries today on trade, it naturally
leads other countries to stiffen their resild to resist the US.
Another big problem with trade wars is that, again, there
(10:06):
can be a lot of collateral damage. Poor people tend
to suffer disproportionately since basic necessities that they already struggle
to afford, like food, shoes, and transportation, can become more expensive,
and working class jobs can take a hit as well.
Let's continue with the example of steel, which the Trump
administration actually did impose tariffs on in twenty eighteen from Canada, Mexico,
(10:29):
and the European Union. Ast off Works spoke by email
in twenty nineteen with Philip I. Levy, who's now a
lead trade economist at the World Bank. He explained, if
you are in a steel using sector, like an autoparts manufacturer,
you are more likely to be hurt by the steel tariffs.
If you're in the construction sector, you're likely to be
(10:50):
hurt by terras on steel. These are hits to income
and employment, which are in addition to the hits people
take as consumers. To be fair, if you're a shareholder
US Steel, you're pretty happy you don't have to face
as much competition. True for workers as well, but much
of the job loss has been to automation, not trade,
so the tariffs don't fix that. The world economy and
(11:14):
global trade are stronger today than they were in the
early nineteen thirties, but a trade war today might be
even more damaging. Letty said, there's this unusual argument about
why this is a great time for a trade war.
It's a little like saying that today is a good
day for me to slam my hand in the car
door since I don't have to give a piano performance
in the near future. While that may be true, it's
(11:37):
still not a good idea to slam my hand in
a car door. He continued. Why might now be worse
than the nineteen thirties for the United States? Back then
everyone was doing it and we didn't really have global
supply chains. And now it is not the case that
all countries are raising trade barriers against everyone else. It's
the United States that is carving itself out of global
(12:00):
supply chains. All of that means that because most of
the rest of the world is still playing nice with
trade deals, American businesses could be uniquely disadvantaged by expanding
tariffs in the United States. Today's episode is based on
(12:21):
the articles who Wins and Loses in a Trade War?
Written by Patrick J. Higer and who Wins and Loses
If the US imposes Steel Tariffs written by John Donovan
on HowStuffWorks dot Com. Brain Stuff was production of iHeartRadio
in partnership with how Stuffworks dot Com and is produced
by Tyler Klang. Four more podcasts my heart Radio, visit
the iHeartRadio app, Apple Podcasts, or wherever you listen to
(12:42):
your favorite shows.
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