Balancing Borders and Profits

Yes, that is correct. The United States has used tariffs very effectively throughout history. In fact, one of the very first tariff acts dates back to the 18th century when the U.S. federal government imposed high tariffs to pay for wars. Before income tax and corporate tax, tariffs were the primary way the federal government funded its expenses.

Of course, over time, the application of tariffs has changed, especially after the Second World War with the establishment of multinational organizations such as the United Nations. There was a general effort to regulate the use of tariffs, particularly by developed countries, throughout the second half of the 20th century.

There have been multiple negotiations, eventually leading to the formation of the World Trade Organization. Today, close to 200 nations are members of the WTO. Each country, upon accession to the WTO, commits to what is called bound tariff rates. A bound tariff rate is the maximum tariff a country agrees to apply, which it cannot exceed except in unusual and very rare circumstances.

There was a consensus that developed nations, being able to afford lower tariffs, reduced their tariff rates, while developing nations adopted relatively higher tariffs. A small group of least developed countries can actually use tariffs more freely, as they have more flexible bound tariff rates.

A tariff essentially raises the price of a product in the country that imposes it. The most common reason governments use tariffs is to protect domestic industries, especially industries like steel, which can create many jobs. Investments in steel are often subject to heavy tariffs because steel is a global commodity, with hundreds of millions of tons being traded between countries.

When a country imposes tariffs, its domestic steel producers can increase their investments and create jobs, which is beneficial for the economy. Countries can also use tariffs to discourage the consumption of certain items, particularly luxury goods such as luxury cars and jewelry. It is not uncommon for these products to be heavily taxed by governments to reduce their consumption.

Additionally, tariffs can be used as a political tool. Countries with large economies, such as the U.S., the European Union, and Canada, have used tariffs as leverage to advance their agendas. By signing free trade agreements with key countries, governments can promote alliances and strategic partnerships. At the same time, tariffs can be used as a form of pressure to align the political priorities of other nations with their own. We especially saw this with the Trump administration, which aggressively pursued a strategy of using tariffs as a bargaining tool or enforcement mechanism with other countries.

Yes, tariffs initially help domestic industries by creating jobs, promoting investment, and fostering economic growth. They can be beneficial in the early stages of industrial development, but it should be kept in mind that tariffs also raise the price of products. Over time, this can hurt the poor and middle class by limiting access to cheap and affordable key products and goods.

Therefore, governments should adopt a thoughtful strategy when using tariffs. For example, it doesn’t make sense for a country to promote its steel industry by imposing high steel tariffs if it lacks key raw materials or the necessary infrastructure, such as access to ports and a skilled labor force. Instead, countries should focus on their strengths and consider their competitive advantages. Additionally, the impact of tariffs should be closely monitored.

I believe that in the initial stages of an industry's growth, tariffs can be helpful in shielding companies from unfair competition. However, once an industry is established and can sustain itself, tariffs should be reconsidered. As you correctly pointed out, excessively high tariffs that shield a company from competition can actually discourage innovation, which is ultimately not beneficial for the country.

A good example of this is the Soviet Union. For a long time, companies operating within the Soviet Union were essentially insulated from any competition. After the collapse of the Soviet Union, it became clear that the quality of its products was far behind those of its Western competitors. Ultimately, this lack of competitiveness contributed to the collapse of the Soviet Union, as the country could no longer sustain its high expenditures, and its economy was failing to function effectively.

A key dispute nowadays between countries is securing access to critical raw materials for industries. China, for example, is often accused of blocking the export of key raw materials to prevent its competitors from gaining access to them, which would enable those competitors to produce and compete with China’s downstream products.

This issue has sparked significant controversy and ongoing disputes. For instance, European Union steel producers are lobbying to block the export of scrap metal from Europe to other countries, as scrap is a crucial raw material for steel production. While there is considerable debate over the imposition of tariffs, it is not uncommon for countries to apply export tariffs. This means that when a country exports a raw material, its government collects taxes on the export to discourage foreign competitors from accessing these essential resources.

This is an interesting development, and countries closely monitor what their competitors and counterparts are doing in terms of restricting access to key raw materials.

Tariffs can be a very effective bargaining tool if your economy is large and you import a significant amount of goods. This is especially true for the United States, one of the world's largest economies, which imports billions of dollars’ worth of products. Every key exporting country would be concerned about losing access to the U.S. market. We have seen the Trump administration frequently use tariffs as a political tool.

However, this strategy can also backfire by encouraging U.S. competitors to reduce their reliance on the U.S. market. For example, especially after the sanctions imposed on Russia, key adversaries of the United States and Europe have begun seriously developing an alternative currency for conducting trade. This has also accelerated discussions among other countries regarding free trade agreements, alliances, and investment pacts aimed at reducing their dependence on the U.S. market.

While governments use tariffs as a tool, they must also consider the long-term consequences — specifically, that excessive use of tariffs could push other nations to develop alternative markets, ultimately reducing the significance of the U.S. market for their exports.

Very few companies can actually absorb the cost of a tariff on their own. First of all, the products and goods subject to these tariffs are often commodities, where producers operate with very low profit margins. Most companies I have worked with do not have the kind of profit margins necessary to absorb these costs.

The only way for companies to bear the cost of tariffs without passing them on to consumers would be through government subsidies. This does happen — China is a prime example, where many industries receive subsidies, allowing companies to absorb tariff costs without increasing prices. However, in my opinion, this is not a very common occurrence.

Our firm specializes in a specific area of trade law known as trade remedy measures. Countries that are members of the World Trade Organization (WTO) commit to bound tariff rates and, except in rare situations, cannot exceed those tariffs. One of the ways they can apply additional measures is through what is called a trade remedy measure.

There are three types of trade remedies. The first is anti-dumping, which applies when producers in a country set export prices lower than their domestic prices. This practice, known as dumping, can harm local producers in the target country. If dumping is determined and it is proven that these exports are damaging domestic industries, the target country can impose anti-dumping measures equal to the difference between the export price and the domestic price of the exporting country.

The second trade remedy measure is anti-subsidy, which addresses government subsidies. If a producer of a given product receives government support — such as cash subsidies, tax grants, or other forms of assistance — that unfairly boosts their exports, other countries can impose anti-subsidy measures to neutralize the impact of those subsidies.

The third and less commonly used trade remedy measure is a safeguard, which is applied in rare circumstances. Safeguards are used when imports of a product increase dramatically, causing serious injury to domestic producers. If a country can demonstrate such harm, it may impose safeguard measures to protect its industries.

Our firm assists companies, governments, and trade associations that are the targets of these investigations. We work to minimize the impact of these measures on our clients. We collaborate with governments and trade associations worldwide to navigate trade remedy cases effectively.