5 things to know about tariffs

President Trump agreed on Monday to delay imposing a 25% tariffs on Mexico and Canada while leaders work to negotiate new trade and border security deals.

So far, it appears a 10% tariff that was announced on goods from China will begin Tuesday.

Washington Bureau Chief Alex Cameron shared 5 things to know about tariffs:

The Purpose of Tariffs

Tariffs have been a key aspect of U.S. trade policy. Their initial purpose was to generate revenue for the federal government and to help fledgling domestic industries grow. According to Dartmouth economist Douglas Irwin, tariffs have served three primary purposes: "to raise revenue for the government, to restrict imports and protect domestic producers from foreign competition, and to reach reciprocity agreements that reduce trade barriers."

The Origin of U.S. Tariffs

The U.S. Constitution, ratified in 1788, gave Congress (specifically, the House of Representatives) the authority to levy taxes and tariffs. The new government, which took shape and began work in 1989, needed a way to collect taxes that was easy to enforce and had only a nominal cost to the average citizen. The Tariff of 1789, signed into law by President George Washington, imposed an import tariff of about 5% on nearly all goods. A year later, the U.S. Coast Guard – initially called the U.S. Revenue Cutter Service – was created to collect the tariffs.

Hamilton and Lincoln: Defenders of Tariffs

Alexander Hamilton, the nation’s first Treasury Secretary, was a leading voice for protectionist tariffs in the nation’s infancy. He and other intellectuals believed they were the best tool for protecting the nation’s developing manufacturing industries. In his Report on Manufactures, Hamilton argued that, in order to grow industry on American soil, it would have to be temporarily protected against foreign competition, which could be achieved through duties on imports. He acknowledged this would cause prices, at first, to go up, but ultimately to become cheaper. Abraham Lincoln, the nation’s 16th president, said, "Give us a protective tariff and we will have the greatest nation on earth." Lincoln believed strongly, if tariffs could provide a domestic supplier with the protection to ramp up production without delay, then the U.S.-made product would be cheaper, and thus the correct policy for government.

Free Trade

After World War II and the success of the Marshall Plan in Western Europe, the United States led efforts to build a new international financial order that included the 1947 General Agreement on Tariffs and Trade (GATT), which was the start of an era of lower tariffs and trade barriers, leading to greatly expanded international trade. During the Reagan and George H. W. Bush administrations, Republicans abandoned protectionist policies. The Canada-U.S. Free Trade Agreement of 1987 was a precursor to NAFTA (North American Free Trade Agreement) pushed through Congress by President Bill Clinton in 1993. In 2000, Clinton and the Republican-led Congress gave China entry into the World Trade Organization (WTO), granting it “most favored nation” trading status.

Types of Tariffs

There are several types of tariffs that a government can employ:

1. Specific tariffs
2. Ad valorem tariffs
3. Licenses
4. Import quotas
5. Voluntary export restraints
6. Local content requirements

A specific tariff is a fixed fee levied on one unit of an imported good. This tariff can vary according to the type of goods imported. Investopedia gives the following example: a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.

An Ad Valorem tariff is the most popular type of tariff and is levied on a good based on a percentage of that good's value. Investopedia gives the following example: a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $40,000 vehicle now costs $46,000 for Japanese consumers. This price increase protects domestic producers from being undercut but also keeps prices artificially high for Japanese car shoppers.