All of the talk of tariffs in the past several years has been far afield from the actual economic concerns of the American people.
Advancing American Freedom, the conservative advocacy group led by former vice president Mike Pence, has released a new report on trade policy. The report is grounded in U.S. economic history and keeps the focus of trade policy on the interests of Americans while making a case for expanding free trade with only a limited role for tariffs.
The report lists three purposes for tariffs in U.S. history: raising revenue, protecting domestic industry, and punishing adversaries. “None of these rationales is intrinsically improper,” it says, but they have little application to the current U.S. economic reality.
It is not mathematically possible for tariffs to balance the budget or even put a significant dent in the deficit without enormous downsides for Americans. Even with the tariff hikes from the Trump and Biden administrations, tariffs accounted for only 1.5 percent of federal revenue in fiscal year 2024. That means the government could increase tariff revenue by a factor of six and it would still account for only a single-digit percentage of federal revenue.
The deficit last year was about $1.8 trillion. Tariff revenue was $73 billion. Even an enormous increase in tariff rates would not raise $1.8 trillion, and forecasting what such a dramatic change would accomplish is difficult because it would significantly alter the purchasing patterns of consumers and businesses. And Trump has at various points promised to use tariff revenue to offset income-tax cuts, which would leave the deficit unchanged anyway. “Simply put, tariff revenue is not a credible solution to America’s debt crisis,” the report says.
With revenue aside, the report turns to the next rationale: protectionism. Protective tariffs don’t raise very much revenue. Their goal is to prevent foreign goods from entering the country at all, and if they don’t enter the country, they don’t get taxed. Consumers still pay more from protective tariffs, but instead of the money going to the Treasury, it goes to businesses in protected industries that can now charge higher prices in the absence of competition.
One of the major problems with protective tariffs is that they hurt domestic manufacturers because about half of U.S. imports are intermediate goods used for domestic production. The report notes that the International Trade Commission listed manufacturing, apparel, auto parts, computer parts, electronics, and general purpose machinery among the industries most harmed by the tariffs that already exist.
“In many of these cases, the industries most negatively impacted are being subsidized by the government through other policies,” the report says. Think of the car company bailouts, “buy American” requirements for federal projects, or subsidies for semiconductor companies. “The best way to help U.S. industries compete and dominate the world is to reduce the immense regulatory burden imposed by Washington,” the report says, instead of harming them with tariffs, then subsidizing them to make up for it.
The clearest case of that malady is in agriculture. When the U.S. faced retaliatory tariffs from China, the government bailed out affected farmers to the tune of $27 billion. “Midwest states felt the brunt of retaliatory tariffs,” the report notes, contradicting the idea that tariffs help the heartland or that free trade is only good for the coasts.
If protective tariffs also aren’t a good idea, maybe the third rationale, punishing adversaries, could work. The report notes that according to current government definitions, the U.S. has six foreign adversaries: China, Cuba, Iran, North Korea, Russia, and Venezuela. So right away, if the U.S. is going to use tariffs to punish its adversaries, it shouldn’t be putting tariffs on Canada, Mexico, Denmark, or any of the other non-adversary countries Trump has threatened with tariffs. It also shouldn’t be levying universal tariffs on goods from all countries, which Trump has also promised.
According to 2023 World Bank data, those six U.S. adversaries combined account for 19.6 percent of the world’s economic production. Targeting tariffs at U.S. adversaries should mean 80.4 percent of the world’s economic production is eligible for free trade.
Of those six, China has by far the largest economy. “While the U.S. has several collective defense agreements in the Pacific with countries critical to denying China’s bid for regional hegemony (Taiwan, Japan, the Philippines), it lack comprehensive free trade agreements with all of them,” the report says. “The United States would apply more pressure to our rival China by formalizing trade agreements with these countries rather than threatening them with higher tariffs.”
The report also says even tariffs on adversaries still come with costs for Americans, as the existing tariffs on China have demonstrated. Whether those costs are worthwhile to punish an adversary is worth debating, and the report says this approach could have merit in certain situations. It is still undeniable that the costs exist and are borne by Americans, and that must be taken into account when considering any foreign-policy benefits.
The first two historical rationales for American tariffs do not apply to today’s economy, and the third one has very limited relevance. The report illustrates why all of the talk of tariffs in the past several years has been so far afield from the actual economic concerns of the American people. And if tariffs are going to be a part of U.S. economic policy going forward, they should be targeted toward enemies as part of a foreign-policy strategy with measurable goals, not threatened indiscriminately at the president’s whim.