By: Drew Thompson

The latest in tax news is the change in tariff policy set to take place on Tuesday, February 4th. Specifically, President Trump plans to roll out increased tariffs on Mexico, Canada, and China. The President’s newest pronouncement promises to enact 25% tariffs on goods from Canada and Mexico, alongside 10% on Chinese goods. Tariffs have been popular in the last decade as a way of protecting national business interests as well as raising revenue. Yet, what tariffs are and how they function is often overlooked.

The Basics

In its most basic form, tariffs are a tax on imports. Specifically, importers pay the tax based on the wholesale price the importer paid for the product. While it is debated if the importers, consumers, or a combination of both bear the actual price increases, the actual tariff is paid by the importer. Foreign nations and companies do not pay tariffs.

The Secretary of the Treasury enforces tariff policy on the ground and produces regulations to collect tariffs. U.S. Customs and Border Protection enforce those regulations at U.S. ports of entry. Once a good enters the U.S., it is classified and assessed a tariff, if applicable, based on the Harmonized Tariff Schedule of the United States that contains all tariff rates. Goods are typically classified and valued by the importer which is reviewed, and occasionally audited, by Customs and Border Protection. Tariffs, like most taxes, are not allocated to specific accounts or initiatives and are typically deposited in the General Fund of the United States.

Policy Purposes

Tariffs are imposed for a variety of reasons. One of the more popular justifications for tariffs is to encourage companies to move international production to the United States. When a product is sold in the same country where it is produced, there is no importation and no tariff. This is true even when a corporation manufactures a product on behalf of a foreign corporation and the proceeds are sent overseas. Governments like moving production stateside as it may increase domestic investment and jobs. Tariffs can also help fledgling domestic industries grow to compete with more advanced international industries in fields with high barriers to entry. One example is the auto market where it is difficult for new auto manufacturers to enter. If an advanced foreign producer can’t compete due to tariffs, a less advanced domestic producer has time to grow and compete.

One often overlooked use of tariffs is the revenue-raising function. When tariffs are widespread enough the amount of money raised can be substantial. However, tariffs are rarely broad enough to generate significant revenue. Further, tariff revenue may be reduced over time if the tariff was intended to encourage domestic production. Tariffs are also frequently used to punish bad corporate behavior or persecute international disputes.

Historical Basis

Originally, tariffs were created by Congress. The U.S. Constitution grants Congress the exclusive power to levy tariffs on goods. When Congress imposes tariffs or delegates tariff authority to the President, it exercises that authority. In the 1930’s in response to the Great Depression Congress authorized the President to negotiate trade agreements and proclaim tariff reductions to a pre-set boundary. These agreements could be enacted without further action from Congress. Congress delegated more authority to the President in the Trade Act of 1974 which created the “fast track” system. The fast-track system gave the President authority to negotiate trade agreements that could be confirmed with a simple majority vote in Congress without amendment or filibuster. However, most tariffs are not created by agreement and are not subject to congressional approval.

Modern Tariffs

The modern tariff was established by three statutes empowering the President to act unilaterally in the tariff world. The first statute was Section 232 of the 1962 Trade Expansion Act. The 1962 Act empowered the President to adjust tariffs if an item was imported in such quantities or circumstances that it threatened national security. These tariffs apply to the specific product regardless of the country of origin. To impose Section 232 tariffs there must first be a Department of Commerce finding that the import threatens national security. To date, the Department has authorized 31 trade investigations but only found in half that the imports in question threatened national security. Yet, in 2017 the Department adopted broader definitions of national security including “general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements.” This expanded definition of national security may allow for more liberal use of the 1962 Act in the future.

Second, Section 201 of the Trade Act of 1974 authorizes the President to raise tariff rates temporarily when the International Trade Commission finds that a product import surge occurred, and that US industry was seriously injured or threatened. Yet, a Commission finding takes a minimum of 180 days and the tariffs must be reviewed after four years.

Last, Section 301 of the Trade Act of 1974 allows tariffs to be imposed once a U.S. Trade Representative investigation has found that the country subject to the tariff engaged in unfair trade practices. Once the Representative has made the finding, the President can impose tariffs against all imports from that country. The investigation and implementation process can be slow, up to 12 months, but once a U.S. Trade Representative has completed an investigation and established its finding that finding remains in place. For example, when U.S. Trade Representatives found that China engaged in unfair trade practices it opened the door to Section 301 Tariffs.

Summary

The combination of these three acts effectively allows the President to act unilaterally in the realm of tariffs though most of these statutes require some other authorization. That authorization includes a U.S. Trade Representative or International Trade Commission finding or Congressional inaction. Further, Congress retains the power to repeal or enact new statutes. Yet, any act of Congress must either be approved by the President or muster two-thirds of both houses to override a veto. Congress also has the power to end emergency declarations that may support some tariffs.

There are a variety of policy purposes behind tariffs including encouraging domestic production, protecting nascent industries, raising revenue, and addressing international disputes. Tariff history in U.S. law starts with total Congressional authority and gradually moves to Congress’ delegation of power to the executive branch. The modern legal framework for tariffs is based on key statutes that empower the President to unilaterally impose tariffs. Despite the President’s prominence in tariff policy, some checks and balances remain, such as the requirement for findings from various government bodies and the ultimate power of Congress to legislate in this area. As we look toward potential changes in tariff policy in 2025, understanding this complex interplay of law, economics, and politics will be crucial for businesses and policymakers alike.

Andrew L. Thompson joined Lane & Waterman in 2024. Andrew primarily specializes in civil defense litigation, encompassing a diverse array of matters such as tax, employment, labor, estate litigation, and other commercial litigation.