Donald Trump has suggested that a universal tariff on all imported products would raise enough revenue to cut income taxes. This idea is at odds with the policy consensus of recent decades, but it has a clear historical precedent: Before 1913, federal revenue came primarily from tariffs, and except for 10 years during which the country was paying for the Civil War and Reconstruction, America had no income tax. This means that the United States was a tariff-protected economy for most of its history. There were duties on everything from clothes to steel, which helped the United States industrialize and become the world’s leading economy. So it isn’t surprising that when looking for ways to fund income tax cuts, Trump proposed a universal tariff.
The bipartisan Coalition for a Prosperous America has estimated that a 10 percent universal tariff would indeed raise significant revenue; however, because the federal budget is a much larger percentage of GDP than it was a century ago, tariffs can no longer bring in enough to cover more than a modest proportion of it. A universal tariff that was, in theory, high enough to raise a large share of the required revenue would be self-defeating. It would reduce imports so much that actual tariff revenue would fall, and the percentage of the tariff collected on the remaining imports paid by Americans (as opposed to foreigners) would increase.
For these and other reasons, the focus of the tariff policy debate should be on their other uses, with revenue as a welcome byproduct. So, what are tariffs really good for?
Tariffs are the most effective way to control the composition of America’s trade—what goods and services the nation imports, how much, and from where. They achieve this through two mechanisms: industry-specific tariffs and country-specific tariffs.
“What we import plays a huge role in determining what industries will thrive.”
What a country imports plays a huge role in determining what industries will thrive, or even survive, in America. To remain a high-wage society, America needs high productivity, which, in turn, requires strong positions in advanced industries like electric cars and their supply chains. If Americans import electric cars from a low-wage, high-subsidy country like China, the domestic EV industry won’t stand a chance. This is why President Biden was right to impose a tariff against Chinese EVs in June 2024, and why then-President Donald Trump was also right to impose tariffs and quotas on Chinese steel.
To illustrate the benefits of industry-specific tariffs, consider the effects of Trump’s 2018 near-global 25 percent tariff on steel. First, it reduced America’s steel imports by 24 percent. Second, capacity utilization—how much factories were making versus how much they were capable of making—rose above the 80 percent required for the industry’s long-term viability. And third, the American steel industry invested $16 billion, adding significant new US capacity, including 15 brand-new mills and other steel-making facilities, at locations from Florida to Texas to Arizona.
To take only one example, Steel Dynamics’s new Sinton, Texas, facility will employ 3,000 workers when it is fully operational. According to the firm’s Securities and Exchange Commission filings, the median pay for a Steel Dynamics employee last year was $119,460. The new plant is already producing steel, with some 600 employees working there. The knock-on local economic benefits are already visible: Local developers are planning to build some 400 new houses in the area to accommodate steelworkers and the employees of their supplier firms setting up in the area.
Did this contribute to inflation? No. Studies by both the Coalition for a Prosperous America and US International Trade Commission confirmed that the steel tariffs did not significantly increase consumer prices, did increase domestic production, and did induce significant domestic investment.
Where a country imports products from is also important. If the national interest demands that Americans economically decouple from China—an option seriously under debate—country-specific tariffs will be essential to doing this without also decoupling from friends and allies. Washington will need their help to block Chinese goods that are relabeled and shipped through their ports, plus goods made by Chinese-controlled manufacturers that set up plants in those countries.
The United States is never going to win a subsidy race with China, but Amerivans can use tariffs to make sure these subsidies don’t allow the People’s Republic to wrest away US markets from US producers.
Tariffs face opposition from mainstream economists and free-trade acolytes, who argue that they lead to inefficiencies. Critics typically argue that, according to commonly used economic models, tariff’s negative effects outweigh their benefits.
But the flaws of these models are now well understood. For one thing, they assume that tariff revenues will be sequestered, thus reducing investment and consumer spending, rather than injected back into the economy as government spending or tax cuts. They also assume that US importers and consumers will bear the full costs of tariffs, ignoring evidence that a significant percentage is often borne by the exporting nations due to a reduction in their profit margins. Finally, they ignore the long-term value of retaining high-value and otherwise economically significant industries, as well as the effect of tariffs in stimulating domestic manufacturing investment and employment.
Why should we care what industries America has? Because not all industries are created equal. As Laura D’Andrea Tyson, Bill Clinton’s chairwoman of the Council of Economic Advisers, once put it: “A dollar’s worth of shoes may have the same effect on the trade balance as a dollar’s worth of computers. But … the two do not have the same effect on employment, wages, labor skills, productivity, and research—all major determinants of our economic health.”
Unfortunately, Clinton didn’t listen to Tyson, and instead pushed hard in the early 1990s to expand trade, taking a hands-off stance about what sort of industries were most important for America to have. Until the Trump administration, America stayed on this free-trade path, and the nation paid the price with a ballooning trade deficit, lost jobs and factories (especially in manufacturing), and a rapidly shrinking industrial base.
We now know that “free trade” really amounts to a free-for-all, in which other countries practice mercantilism—a trade strategy that dates back to the days of sailing ships and treats industrial policy as a game whose object is to increase a nation’s economic power—against an unprotected America. Today, nations from China to Germany play this game, some more brutally and some more politely. But they are all chipping away at America’s best industries, from consumer electronics to steel to machine tools to commercial aircraft.
Other countries want these industries for the same reasons Americans do, so the United States is in a perpetual rivalry to preserve them. If Washington doesn’t use tariffs to protect high-value industries, the United States will end up the victim of other countries that heavily subsidize these industries to target America’s. The United States will continue to be pushed into lower-tech, lower-value-added, lower-wage industries. The famous “China Shock” paper by David Autor of MIT documented the damage this did, and is still doing, all across the American heartland—not just in lost jobs and businesses, but drug addiction, crime, deaths of despair, and the collapse of small towns.
The most worthwhile use of tariffs is to protect these key industries: both existing and new high-tech and mid-tech industries that together employ large numbers of people at good wages, and their supply chains. Tariffs limited to these industries would generate more investment, more good jobs, and more long-term growth per dollar of protection than a universal tariff.
Tariffs are now vindicating themselves as what earlier generations of Americans knew them to be: genuinely useful tools for national economic development. That they throw off significant revenue is nice, but it isn’t their main value. The income tax is here to stay.