The term “tariff” appeared 23 times in the most recent World Economic Forum Chief Economists Outlook. And for good reason.
It’s not surprising that people paid to understand and interpret the global economy should be preoccupied by these taxes on foreign-made goods. The punitive range of tariffs now being previewed by the incoming US administration, after all, have been described as an impending disaster likely to make an already volatile geopolitical situation worse.
Many economists view tariffs with scepticism. Particularly at times of already-heightened inflation – a nuisance with the power to fray the social fabric and turn elections.
That’s because when countries apply tariffs, companies can simply pass along the added cost of their imports – not only making things on store shelves more expensive, but also raising prices for parts from overseas that domestic firms need to assemble their own goods for export. Another thing about tariffs: countries tend to respond to them in kind. Turns out, applying a shopworn tool to the globalized economies of the 21st century can make for an awkward fit.
“Economists are famous for disagreeing on things,” said Larry Summers, the economist and former US Treasury Secretary, during a Davos panel. But nothing commands more agreement across the profession than the idea that bluntly applying sustained, broad-based tariffs “is not likely to be economically positive,” he said.
While their popularity may wax and wane, tariffs have endured for thousands of years.
Tariffs: a way to counter ‘dumping’ and raise revenue
If tariffs make economists so anxious, it’s fair to ask why they continue to appeal to government officials. Are they ever a good idea?
Applied surgically, they can be a justifiable way to nurture domestic industries and jobs. They can correct the effects of cheap products being dumped from abroad to undercut local firms, or provide a way for governments to prop up parts of an economy deemed vital for stability, security, or both.
In a more short-term way, they can serve as an ample source of government revenue.
Palmyra, an ancient trading city in what is now Syria, codified its tariff regime on a block of limestone in 137 AD; it applied them to imports including slaves and perfume. Anyone can go see that inscribed limestone in a museum in Russia.
Actually, not just anyone. A sizeable number of people have been warned not to travel to Russia following its invasion of Ukraine nearly three years ago – one of many recent signs of worsening global fragmentation.
After conquering Constantinople in 1453, the Ottoman Empire slapped tariffs on many goods that had regularly flowed through the cosmopolitan city. That forced explorers to find new water routes.
A couple of centuries after that, a French minister hit English and Dutch goods with stiff tariffs that sometimes reached 100% (making the US’s proposed rates that max out at 60% seem like a relative bargain). One result, according to some historians, was a war with no satisfactory outcome for France.
The minister’s protectionist policies made such mark that they form their own eponymous category: “Colbertism.”
In the 19th century, the US made heavy use of tariffs in a bid to prop up its own industries. The contribution these made to the country’s economy, or at least the size of that contribution, is a matter of debate. There seems to be far more consensus on the fact that the thoroughly protectionist economy that resulted concentrated massive amounts of wealth, and dramatically increased inequality.
Another thing economists point to as an uncomfortable truth: the domestic impact of tariffs tends to fall hardest on poor households.
Imposing tariffs on metals, for example, could benefit communities that rely on a local, domestically owned aluminium factory. It could also hurt communities that rely on producing and exporting things made with many foreign components, like cars – and that’s before other countries start retaliating with their own tariffs.
At a time when collaboration seems increasingly scarce, opting to move even more aggressively in the opposite direction could have a wide variety of repercussions.
Don't miss any update on this t
Weforum