Historical Background of Tariffs in the U.S.
Since the first American Congress, tariffs have been a fundamental part of American economic policy. The Tariff Act of 1798, championed by Founding Father Alexander Hamilton, was crafted to serve two main objectives: to foster domestic growth by protecting American interests from foreign interference and to secure a stable revenue source for the federal government. This strategy proved effective, with tariffs contributing around 95% of federal revenue at the time.
Over time, however, the role of tariffs diminished. As the U.S. economy became more sophisticated and industrialized and the income tax was introduced, the revenue from tariffs became less critical. After World War II, tariffs were significantly reduced as the U.S. led the establishment of the General Agreement on Tariffs and Trade (GATT), followed by the formation of the World Trade Organization (WTO) and the Dollar Standard. This shift promoted free trade, allowing countries to produce goods they excelled at without facing penalties, paving the way for a new era of global cooperation with the U.S. at the forefront.
The Era of Free Trade
For decades, free trade became increasingly popular. Policies advocating for reduced trade barriers, championed by the Reagan-Thatcher era and reflected in the EU’s single market, minimized the need for tariffs. Globalization led to greater movement of goods and people worldwide, making global travel easier and connecting people more closely through the internet. However, in recent years, tariffs have reemerged as a central issue in political economics.
Why Are Tariffs Back?
The resurgence of tariffs is largely linked to protectionism. Governments often impose tariffs to shield domestic industries, jobs, and sometimes nationalism from foreign influence. Tariffs increase the cost of imported goods, making them less attractive to consumers, and can also serve as a source of revenue if popular goods continue to be imported despite higher costs. For the U.S., tariffs have multiple roles. From a position of power, they can encourage negotiation with other countries. The IMF, however, warns that tit-for-tat tariff strategies harm both the global and domestic economies.. Pierre-Olivier Gourinchas, IMF’s chief economist, recently cautioned, “A lot of these trade-distorting measures could reflect decisions by countries that are self-centered and could be ultimately harmful to both the global economy and the countries that implement them.”
Trump/Republican Stance on Tariffs
Trump’s economic policy, known as “Maganomics,” is a central feature of his re-election campaign. It builds on his first-term policies but in a more aggressive way, emphasizing tax cuts and reintroducing protectionist tariffs reminiscent of those under the 1930s Smoot-Hawley Tariff Act. This approach appeals to “working Americans” by seeking to encourage domestic production over overseas manufacturing, allowing for tax reductions that would ideally spur local spending, business expansion, and job creation.
A primary funding mechanism for this vision is through tariffs, particularly targeting China at 60% and other foreign economies at 20%. Trump’s economic agenda suggests that current Biden administration policies have destabilized the economy, promising “low taxes, low regulations, low energy costs, low interest rates, and low inflation,” aiming to make essentials like groceries, cars, and homes more affordable.
However, economists argue that broad tariffs on all nations—including U.S. allies—could lead to trade retaliation, risking strained relations with key partners. During the recent BRICS summit, discussions among major economies like Russia, Brazil, India, and China focused on reducing dependence on the U.S. Dollar and the Euro, a trend that could have significant economic consequences. The IMF is firm that such tariffs could damage the global economy, with the Peterson Institute estimating that Trump’s tariff plan could cost U.S. households an additional $2,600 per year. Still, Trump’s clear strategy and economic promises resonate with voters eager for change.
Harris/Democratic Stance on Tariffs
A Democratic victory led by Kamala Harris would likely introduce a more selective tariff policy, echoing aspects of Biden’s approach while rejecting broad tariffs like those proposed by Trump. Harris criticizes Trump’s strategy as a “reckless national sales tax” that could cost middle-class families up to $4,000 annually. Instead, her policy would likely focus on targeted tariffs aimed at specific national security risks, especially in relation to China.
The Biden administration has continued many of the Trump-era tariffs, with recent increases targeting an additional $18 billion in Chinese imports to protect U.S. industries from subsidized Chinese goods that threaten competition and innovation. These tariffs, ranging from 7.5% to 100%, impact products like clothing, solar panels, electric vehicles, steel, and semiconductors, often sold at lower prices than American-made alternatives.
While Harris has not fully outlined her own tariff policy, she has expressed support for protective trade actions aimed at shielding key U.S. industries. Her administration would likely continue Biden’s selective tariffs, particularly in sectors where China holds a strategic edge in advanced technology and renewable energy. Harris’s plan also proposes subsidies through her “America Forward” tax credit, targeting competitive boosts for U.S. industry in sectors such as clean energy, much like the Biden administration’s Inflation Reduction Act.
Unless she introduces a distinct trade policy, it’s reasonable to expect Harris will continue the pattern seen during the Biden administration: avoiding new free trade agreements, emphasizing targeted tariffs, focusing on labor rights and environmental standards, and offering industrial subsidies. This balanced approach suggests Harris aims to protect American jobs and industries while mitigating the potential economic impact of sweeping tariffs on households.
Dividends
So, how does this all relate to dividends? Both candidates endorse protectionism to varying extents, but Trump’s proposed blanket 20% tariffs are not matched by Harris. Stocks vulnerable to these tariffs in Europe have dipped, and companies reliant on imports and exports may cut dividends to mitigate costs.
For example, would Apple face a 60% tariff on phones made in China? With components sourced from 41 countries, including Brazil and India, relocating manufacturing to the U.S. would be time-consuming and costly, likely leading to imported inflation.
U.S. and foreign firms reliant on trade could see dividend pressure. Currently, concerns over a Trump win are only slightly reflected in share prices, with companies like Diageo, LVMH, and Volkswagen down 2% this year, compared to an 8% rise in the broader European market. Economic uncertainty could drive companies to cut dividends, as seen during COVID when 60% of FTSE 100 companies halted payouts.
Protectionism increases cost pressures and uncertainty, likely leading to conservative dividend policies. Companies may choose to retain earnings for flexibility rather than pay dividends, particularly as uncertainty persists. Markets dislike uncertainty, and dividends are often seen as a luxury. Therefore, firms less affected by protectionism will be more attractive to dividend-focused investors.
Sectors such as technology and agriculture are likely to be hit hardest, while utilities and real estate may be less affected. Stable, dividend-paying companies will appeal to investors seeking dependable income, especially amid volatility. The differing tariff policies of the two parties could impact dividends globally, making it essential for investors to consider these changes as the election outcome becomes clearer.
Final Implications
Despite their differences, both parties are converging toward a protectionist stance, reflecting a shared concern for bolstering American industries and reducing economic reliance on foreign powers, particularly China. The contrasting policies underscore a broader tension in the U.S. approach to global trade: balancing domestic industry protection with the benefits of international cooperation. While Trump’s tariff-heavy approach resonates with those who view tariffs as a path to self-sufficiency and economic security, critics warn of potential strain on household budgets and the risk of deteriorating international relationships. On the other hand, Harris’s approach suggests a path toward selective protectionism, aligning tariffs with broader concerns like national security, labor rights, and environmental standards. As the U.S. moves forward, the question remains whether a new era of tariffs can effectively reconcile domestic priorities with global interdependence—a challenge that will undoubtedly continue to shape American economic policy in the years to come.
Written and researched by Sarah Perlitz, Josefine Olsen, and Matthew Riding