Nutella, Pencils and Taxes: A Review of Tariff Policy

January 22, 2025

Tariffs are a foreign concept to most people.

Beyond their role as a tax on the sale of foreign goods, in the real world, tariffs are perhaps among the most ambiguous policy tools for those not involved with international trade. We hear tariff policy proposals on the news, but the average person’s attitude toward tariffs may naturally fall in the camp of “not my money, not my problem.”

Not surprisingly, this isn’t really the case. Tariffs are real trade policies, with real costs, real benefits, and result in real customs agents inspecting real cargo in ports to levy real taxes on foreign producers.

During the 1930s, British companies tried to dodge U.S. tariffs by labeling pencils as “educational tools.” Customs officials, upon inspecting the cargo, weren’t fooled and declared, “A pencil is a pencil,” enforcing the tariff.

Nutella, the popular hazelnut cocoa spread, has more recently been at the center of a tariff debate. Is it a “chocolate-flavored spread” or a “hazelnut product”? The distinction affects its tariff rates, with the European Union classifying it as a “chocolate spread,” subject to higher duties, while Ferrero argues it should be a “hazelnut spread” due to its high hazelnut content. This discrepancy has led to regulatory challenges and financial implications for importing and selling Nutella in different markets. The United States considers it a hazelnut spread.

These humorous examples of tariff policies serve as a serious reminder that tariffs shape international trade and influence prices, consumer choice, and industry. Today we will briefly explore the history of tariffs, review their successes, their failures, and provide some perspective on how citizens may draw their own conclusions on the efficacy of tariff policy proposals.

A Brief History of Tariff Policies

Tariffs have played a pivotal role in shaping economic and political landscapes throughout history, evolving alongside global trade practices and economic theories. From the protectionist measures of the mercantilist era to the free trade principles championed by economists like Adam Smith, tariff policies have reflected the priorities and challenges of their times. They’ve been tools of both prosperity and peril—fueling industrial growth in some periods while exacerbating economic crises in others. As we trace their history, we see how tariffs have shifted from instruments of wealth accumulation to levers of diplomacy and modern economic strategy, shaping the world of trade as we know it today.

  • Mercantilist Era (16th–18th Century): Tariffs were used to accumulate wealth and protect national industries. The focus was on limiting imports and maximizing exports to achieve trade surpluses.
  • Classical Free Trade (18th–19th Century): Adam Smith and David Ricardo shifted the conversation, arguing for free trade based on the principles of comparative advantage.
  • Protectionism in the 19th–Early 20th Century: Tariffs like the U.S. Smoot-Hawley Tariff Act (1930) highlighted the dangers of protectionism, contributing to a collapse in global trade during the Great Depression.
  • Post-War Liberalization (1940s–2000s): With the creation of GATT and later the WTO, nations embraced trade liberalization, reducing tariffs to encourage global commerce.
  • Modern Debates (2000s–Present): Tariffs have reemerged as tools of geopolitical leverage and economic strategy, with debates about their use in protecting industries, addressing climate goals, and balancing trade deficits.

Lessons from Failed Tariff Policies

History shows that poorly designed tariff policies can backfire, leading to economic downturns and global disruptions. These failures highlight the risks of excessive protectionism in an interconnected world.

  • Smoot-Hawley Tariff Act (1930): This policy raised U.S. tariffs on over 20,000 goods, sparking global retaliation and worsening the Great Depression, and highlighting how protectionism can backfire in a globally interconnected economy.
  • Excessive Protectionism: Overly high tariffs often lead to rent-seeking and inefficiencies, as seen in industries that become overly reliant on government support instead of fostering innovation.
  • Retaliatory Trade Wars: Examples like the U.S.-China trade conflict (2018–2019) demonstrate how tit-for-tat tariffs raise costs for consumers and disrupt global supply chains.

Failed tariff policies remind us that aggressive protectionism often does more harm than good.

What Works: Widely Acknowledged Successes in Tariff Policy

While tariffs often face criticism, certain applications have proven effective when used strategically. From fostering industrial growth to generating revenue, these successes highlight the potential of well-designed tariff policies to support economic development and stability.

  • Infant Industry Protection: Strategic tariffs, when applied temporarily, can help nascent industries build scale and competitiveness. For instance, South Korea’s post-war industrialization benefited from such policies.
  • Revenue Generation: In developing countries, tariffs can serve as critical sources of government revenue, especially when other tax systems are underdeveloped.
  • Optimal Tariffs for Large Economies: Economists have shown that carefully calibrated tariffs can improve terms of trade for large economies, provided they don’t provoke retaliation.

These examples show that tariffs, when thoughtfully implemented, can serve as valuable tools for economic growth and trade balance. Success lies in careful calibration and a focus on long-term benefits.

Ongoing Debates in Tariff Policy

Tariffs remain a contentious tool in modern trade policy, sparking debates over their impact on global supply chains, their role as geopolitical leverage, and their potential alignment with sustainability goals. These ongoing discussions reflect the complexities of balancing economic, political, and environmental priorities.

  • Global Supply Chains: Tariffs on intermediate goods can have ripple effects, raising costs for domestic manufacturers reliant on global inputs.
  • Geopolitical Tools: Tariffs are increasingly used to counter unfair trade practices, but they risk escalating conflicts, as seen most recently with U.S. tariffs on China.
  • Sustainability Goals: Climate-focused “carbon tariffs” aim to discourage environmentally harmful imports but face accusations of disguised protectionism.

The debates surrounding tariffs highlight their dual nature as both an economic tool and a source of controversy. Finding common ground in these complex issues will be key to shaping effective and equitable trade policies for the future.

A Simple Model for Assessing Tariff Proposals

When navigating the complex and often polarizing discussions about tariffs, it’s essential to distill the key factors driving their economic and market impacts. A simple framework for evaluating tariff proposals helps cut through the noise by focusing on three crucial questions:

Positive AttributesNegative Attributes
Who Pays?Costs are absorbed by foreign exporters or offset by increased competitiveness of domestic producers.Costs are passed to consumers through higher prices, reducing purchasing power and living standards.
What’s the Goal?Protects critical domestic industries or addresses unfair trade practices effectively.Serves narrow interests or simply raises revenue without clear strategic benefits.
What’s the Risk?Tariff encourages favorable trade negotiations or supports local economic development.Provokes retaliatory tariffs, disrupts supply chains, or leads to inefficiencies in global markets.

When you hear about tariffs in the news, the below formulas serve as a simple heuristic for evaluating tariff policy proposals:

  • High consumer costs + unclear goals + high retaliation risk = Red Flag

Policies fitting this pattern are often poorly designed and may result in more harm than benefit.

  • Minimal consumer impact + clear strategic goals + manageable risks = Green Light

Tariffs that fit this profile are more likely to deliver on their promises, whether in protecting industries or negotiating better trade terms.

For example:

  • A tariff on intermediate goods with high supply chain reliance could disrupt domestic manufacturing, increase consumer costs, and invite retaliation—likely a net negative.
  • Conversely, a temporary tariff aimed at fostering the growth of a nascent industry might offset risks with long-term gains, especially if its goals are clear and its implementation measured.

Closing Thoughts

Donald Trump’s proposed tariffs—ranging from 10–20% universal tariffs to 60–100% tariffs on Chinese goods—represent a bold extension of his first-term trade strategy. While these measures aim to boost domestic manufacturing and federal revenue, they also carry risks, including higher consumer costs, supply chain disruptions, and potential retaliation from trading partners. Historically, tariffs have been effective when applied strategically and temporarily, but overly aggressive policies, like the Smoot-Hawley Tariff Act, have shown how poorly designed tariffs can harm both economies and global trade relationships.

While Trump’s rhetoric suggests a strong commitment to tariffs, these proposals may also serve as negotiation tools, potentially leading to more moderate implementation.

We hope this primer on tariff history, efficacy, and principles will be useful to you as you filter through news reports and policy proposals each day. Rest assured, we are closely monitoring these developments and their potential effects on markets, ensuring your portfolio remains well-positioned to navigate changes and capitalize on emerging opportunities. As we step into a new year, we are grateful for your continued partnership. As always, please don’t hesitate to contact your Fiduciary Investment Advisor if you have any questions or concerns regarding your investments or financial plans.

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