.webp)
Affordability and inflation were key issues in the 2024 Presidential Election. Vice President Kamala Harris wasn’t able to shake the record of the Biden administration, during which Americans saw inflation rise to a 41-year high. For their part, Republicans hammered the price increases Americans have seen on food and basic goods.
But affordability and inflation aren’t going away as key issues, at least not yet, because of the potential consequences of the incoming administration’s policies, particularly trade and the growth in the share of the national debt held by the public.
Recently, President-elect Trump announced that his administration would quickly impose tariffs of 25 percent on imports from Canada and Mexico and a 10 percent tariff on imports from China. Although tariffs on imports from China were imposed during the first Trump administration and kept in place during the Biden administration, the proposed imposition of tariffs on imports from Mexico and Canada is a headscratcher. After all, one of the most significant achievements of the first Trump administration was the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA). USMCA is largely the same as NAFTA but has stronger environmental and labor protections.
What Is a Tariff?
A tariff is a tax on imports. Let’s say you own a construction company in the United States and need lumber to build homes. You buy lumber from a Canadian softwood lumber company. You make the transaction, and the lumber is shipped to you. However, it must cross the border between the United States and Canada. U.S. Customs and Border Protection would collect the tariff on that softwood lumber from the importer.
The average price for lumber is roughly $596 per 1,000 board feet. You need about 16,000 board feet of lumber for a 2,000-square-foot home. Your cost for the raw materials is a little more than $9,500. But since you’re importing the lumber to build the home, you’ve got to pay the 14.54 percent tariff on Canadian softwood lumber, which adds another nearly $1,387 to your costs, bringing the total for the lumber to $10,923. Obviously, you won’t eat that cost, so you pass it along to the consumer. The final selling price of that home is higher as a result. (It’s worth noting that the National Association of Homebuilders has called for suspending the tariff on Canadian softwood lumber because of its negative effect on the housing supply).
Historically, tariffs and excise taxes were the main sources of revenue for the United States. The core of the economic system envisioned by Alexander Hamilton was to use tariffs as a primary revenue source and to protect domestic industry. There were issues with tariffs in the 18th century that exacerbated simmering tensions between industrial northern and agrarian southern states. Initially, it showed itself in the Nullification crisis in the early 1830s. Later, these tensions would boil over into a civil war over the issue of slavery.
In 1913, the Sixteenth Amendment was ratified, and Congress began to impose an income tax on individuals. During World War II, individual income taxes would become the federal government's primary revenue source. According to the White House Office of Management and Budget, the individual income tax accounted for 14.2 percent of tax revenues in FY 1934. That figure jumped to 45 percent in FY 1944. In FY 2023, individual income taxes were 49 percent of all federal revenues.
Customs duties and fees have generally been classified as “Other” in revenue data because it’s a small percentage of federal revenue. Custom duties and fees accounted for 5.1 percent of federal revenues in FY 1940. In FY 2023, this revenue stream was 1.8 percent of all tax receipts.
As noted in September, the United States’ relationship with tariffs became complicated in the 20th century. President Herbert Hoover signed the Tariff Act of 1930–better known as “Smoot-Hawley,” after its primary authors, Sen. Reed Smoot (R-UT) and Willis Hawley (R-OR)–against the advice of more than 1,000 economists. Smoot-Hawley created a trade war when the United States was still recovering from the Stock Market Crash of 1929. The Great Depression would worsen. The United States experienced another recession in 1937. The Great Depression wouldn’t officially end until 1939.
More recently, the Bush administration imposed tariffs on steel that ultimately backfired domestically in terms of lost jobs and economic productivity and nearly started a trade war with the European Union. Still, some 200,000 Americans lost their jobs because of the steel tariffs, at a cost of $4 billion in lost wages.
Can a President Impose or Increase Tariffs Without the Consent of Congress?
The short answer is yes. Although Article I, Section 8 of the Constitution gives the “power to lay and collect taxes, duties, imposts, and excises” to the Legislative Branch, Congress has generally delegated this power to the Executive Branch. This is despite the Article I, Section 5 clause that provides Congress with the sole legislative power in the United States system of government.
As mentioned in September, Section 232 of the Trade Expansion Act and Section 301 of the Trade Act allow a president to impose tariffs in certain situations. The Trade Expansion Act requires a national security rationale for the imposition of tariffs, while the Trade Act provides tariff authority to combat unfair trade practices. With the proposed 25 percent tariff on imported goods from Canada and Mexico, some have speculated that powers under the International Emergency Economic Powers Act (IEEPA) could be used.
President-elect Trump is arguing that migration to the Southern border and drugs, particularly fentanyl, in the United States constitutes an emergency. Traditionally, IEEPA has been reserved as a tool to impose sanctions against the leaders of hostile foreign nations. For example, the IEEPA was evoked in Executive Order 12170 against Iran during the hostage crisis in 1979, and it’s still in effect today. More recently, IEEPA has been used against China for undermining the autonomy of Hong Kong and Russia for activities that undermine the security of the United States. Using IEEPA to impose tariffs would be unprecedented.
Legislation has been introduced in the Senate and the House–the Global Trade Accountability Act, S. 1060 and H.R. 2549–to require congressional approval of the imposition of tariffs under unilateral trade actions by a president. Unfortunately, the Global Trade Accountability Act hasn’t moved in either chamber, and neither bill has any cosponsors.
What Do Higher Tariffs Mean for You?
What does this mean for consumers who’ve experienced higher prices at the point of sale for the past few years? Well, it likely means even higher prices. Consider that Mexico and Canada, our closest geographic neighbors, are two of the United States' largest trading partners. In 2023, $475.2 billion and $418.6 billion of goods were imported into the United States from Mexico and Canada, respectively.
Much of what the United States imports from Mexico is manufactured goods, including vehicles and parts. However, about $20 billion worth of agricultural products and livestock are imported from Mexico to the United States. The United States' top import from Canada is oil, and the US is the top buyer of Canadian lumber. A trade dispute already exists between the two countries related to this good.
A 25 percent tariff on all imported goods from Canada and Mexico likely means higher prices for many imported goods. Take vegetables, for example. In 2020, 77 percent of fresh vegetable imports to the United States were from Mexico. Another 11 percent were from Canada. Together, these two countries supplied the United States with some 16 billion pounds of fresh vegetables, ranging from bell peppers to tomatoes to cucumbers to squash.
Under USCMA, there aren’t any tariffs on imported vegetables from Mexico or Canada, but a 25 percent tariff for these imported vegetables means the cost of those vegetables will rise at your local Walmart, Kroger, Publix, Whole Foods, Harris-Teeter, or wherever you purchase your groceries. In fact, Walmart chief financial officer David Rainey recently told Fox Business, “Tariffs are going to be inflationary; there’s no disputing that. And likely, consumers are going to pay more for the items that these tariffs are applied to.”
That’s just the most direct effect. There could be other effects if Canada and Mexico impose retaliatory tariffs on goods exported from the United States that could impact domestic producers of popular items. The European Union and Japan were planning retaliatory tariffs against a host of exports from the United States in response to the 2002 steel tariffs when the Bush administration ended them in December 2003.
The time of economic uncertainty isn’t over, and it may really only be ramping up, especially with mortgage interest rates stubbornly remaining high, but that’s a post for another day. Today, it’s just the guac and salsa at the happy hour after work is about to get more expensive.
