The American Tariff Strategy
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A tariff is a tax on goods imported from other countries. There are
two types of tariffs:
1. A protective tariff: set around 25-35% (or even higher), the
protective tariff is intended to deter citizens from purchasing
foreign goods. In general, the hope is that foreign goods will become
so expensive that the citizenry will purchase locally-produced goods
instead (this is called 'import substitution') and that domestic
consumption will drive the local economy. If a protective tariff works
properly, locals won't buy foreign goods and services and it will
generate very little revenue.
2. A revenue tariff: this tariff is set much lower, at about 10-15%.
The idea is that a minimal tax will have little impact on consumer
behaviour. Citizens will continue to purchase foreign goods and pay
the tax, which will flow to the government.
So the two kinds of tariffs have very different aims.
The Trump administration has imposed a mix of protective and revenue
tariffs against countries around the world. But at the same time, the
American Congress has passed legislation (the Big Beautiful Bill!)
greatly reducing other forms of domestic taxation, which means that
government revenue will decline. High protective tariffs will not
generate enough revenue to recoup those lost taxes. So the aim of the
Trump administration is now to negotiate trade deals that will reduce
any protective tariffs to revenue tariff levels.
This is especially important in the case of major trading partners. A
revenue tariff imposed on trade with Mexico, China, Canada, etc., will
generate the funds necessary to replace lost tax revenues. This is
what was achieved in the deals negotiated with the UK, Japan, and the
EU. If you're an American trading partner, don't expect a free trade
deal in the future. Expect a deal that lowers tariffs to revenue
generation levels. That's now the entire aim of U.S. trade policy.
Most crucially, trade representatives should be aware that the
Americans _need_ to set tariffs at revenue-generation levels and take
advantage of that knowledge during negotiations.
