The Lawn Guy, the Chicken Tax, and Rice: More Tariff Talk

A good friend of mine, after reading the first two installments in this series of posts, asked me exactly the right question:

“Assume you’re the U.S., and your lawn guy is China. You (the U.S.) send lots of dollars to your lawn guy (China). In return, you get your lawn mowed (Chinese goods). So the U.S. has sent dollars to China, which you say is a good thing. Then why does an additional tax/tariff need to be applied on top of the dollars we’re sending them?”

The simple answer is that it doesn’t – tariffs are unnecessary, which is why I don’t like them. But it’s never that simple. Having defined tariffs, let’s dive into why they’re used.

There are two primary reasons tariffs were traditionally imposed on imports from other countries. The first was to generate revenue for the government imposing the tariff. In fact, the U.S. used tariffs as its primary source of revenue during most of the 18^th and 19^th centuries. That changed when the 16^th Amendment was ratified in 1913, which gave Congress the power to levy income tax. After that, the income tax became the main source of government revenue.

(Sidebar: if we would eliminate the income tax, I’d be a big fan of tariffs. A consumption tax, which is basically what a tariff is, makes far more sense to me than an income tax.)

The second reason is to protect domestic commerce. An example is the absurdly named “Chicken Tax.” In the 1960s, the U.S. was exporting large quantities of cheap chicken to Europe, undercutting domestic poultry production. So some European countries imposed tariffs on U.S. chicken exports. In response, President Johnson imposed a 25% tariff on some imported goods from Europe, including light trucks (aimed primarily at VW).

Later, the light truck tariff – still in place today – was expanded to include other countries, including Japan. This helped protect the U.S. auto industry from cheaper imported trucks (and the original “chicken tax” protected European poultry production).

Another example of a protectionist tariff – and it’s a perfectly rational one – is Japan’s rice tariff. The Trump Administration claimed that Japan imposes a 700% tariff on U.S. rice exports. That’s misleading. Japan has a tariff-free import quota for rice. For imports above that amount, it does charge a steep tariff, which got as high as 700% several years ago, but based on recent rice prices, it’s “only” about 400%. Still, the Administration used the higher figure for effect. Also, while the U.S. is a significant exporter of rice to Japan, it generally stays within the tariff-free import quota, so it avoids paying any tariff at all on rice exports to Japan.

Why does Japan charge such a high tariff on rice? Rice farming is very important to Japan’s agriculture sector, and to its culture, because rice is a major food staple in Japan. Japan consumes more rice than it can produce. However, Japan’s rice production is declining due to increased urbanization and a declining rural population. Also, its rice farms are quite small compared to other rice-producing countries. The average U.S. rice farm is more than 100 times the size of the average Japanese rice farm. Without Japan’s tariffs, countries with greater efficiencies and economies of scale like India or Thailand, the largest rice producers, could flood the Japanese market with cheap rice, destroying a key component of its ag sector.

That brings us to another important point: Japan imposes that tariff on all countries it buys rice from. In fact, virtually all countries impose the same tariff rate on all their trading partners under the Most-Favored-Nation (MFN) principle of the World Trade Organization (WTO). One exception to this is negotiated free trade agreements, like the U.S.-Mexico-Canada Agreement (USMCA) or the EU’s single market. These allow countries to have more favorable trade conditions with their partner countries without violating the MFN principle.

Retaliatory tariffs are another exception, and the retaliation may be for dumping goods at below-market prices or other unfair trading practices. Another exception to the MFN principle is tariffs used as a negotiating tool, but let’s revisit that later.

Other than these exceptions, tariff rates are applied uniformly to all trading partners under the MFN principle. If other countries are “ripping off” the U.S. based on the tariff rates they charge, then they’re ripping off every other country they trade with, too. And if all of these countries are charging each other tariffs to the extent that they’re all ripping each other off, you’d think a global trade war would have ensued a long time ago. (At issue is the fact that while the U.S. did impose tariffs prior to President Trump, our tariff rates were generally much lower than other countries.)

I mentioned that President Johnson used tariffs to retaliate against Europe’s “chicken tax,” and that retaliatory tariffs are an exception to the MFN principle. That’s a good clue as to a third use of tariffs besides revenue and protectionism: retaliation. We’ve already talked about that, and we’ve seen it play out in real time in recent weeks between the U.S. and China. I believe that part of the exceedingly high tariffs against China have to do with things other than their unfair trade practices, but we’ll get to that later (sorry to jump around, but I don’t want to go down too many rabbit-holes).

Now let’s talk about tariffs as a negotiating tool, the fourth use case. That can apply to trade – to bring a trading partner to the table to negotiate a better trade deal, improved market access, maybe a free trade agreement like USMCA. Or it can apply to some other policy priority.

During President Trump’s first term, he threatened an escalating tariff against Mexican imports unless Mexico gave him what he wanted on illegal immigration through Mexico from Central America. After negotiations, Mexico agreed to assist with limiting the flow of migrants through its country to the U.S., and the tariff was never imposed.

President Trump used similar tariff threats earlier this year against Canada, Mexico, and Venezuela to gain cooperation on border security, fentanyl trafficking, and repatriation of illegal immigrants from Venezuela. In each case, those countries agreed to terms, and the tariff never materialized. So the U.S. is able to use its considerable economic clout to gain assistance from trading partners in achieving policy objectives unrelated to trade.

Okay, now let’s talk about some of the other possible reasons for the high tariffs on China. First, there’s theft of intellectual property. Remember the recent DeepSeek AI chatbot that China rolled out? It was claimed that it was just as good as ChatGPT, but that it took a fraction of the development time and budget. (Those claims have since come into question; the development cost may actually have been much higher – imagine, China lying to the rest of the world.) Well, when some smart tech people tested DeepSeek and asked it to identify itself, it sometimes identified itself as ChatGPT.

While there’s no definitive proof of IP theft, the fact that the model identified itself as ChatGPT more than half the time suggests that its training data probably included ChatGPT-generated text, which violates ChatGPT’s terms of service.

That’s just one of thousands of examples. China also spies on the U.S. and other countries. Remember the spy balloon? And they recently admitted hacking into some of our key infrastructure. (You’re worried that DOGE may have your Social Security number? Look east, young man.) China copies our technology and sells products using that technology back to the U.S. Our companies can’t sue Chinese companies, because we don’t have access to their courts. But they have access to our courts, so they can sue our companies. Chinese companies operating in the U.S. don’t have to comply with Generally Accepted Accounting Principles (GAAP). They restrict access to our markets for exporters and investors, but they manufacture, sell, and invest here.

Get the picture? The playing field isn’t level.

Let’s go back to my friend’s analogy. It doesn’t make sense for me to charge my lawn guy (China) a tax just on the basis of the trade deficit I run with him, because of the exorbitant privilege I enjoy from not having to mow my own lawn.

But what if I found out that every time he mowed my lawn, he was stealing from me? Peeking into my windows and spying on me? Cheating me in other ways? What if he ultimately wants to take over my house? You can be sure that I’d restrict him from being able to mow my lawn anymore, at least until he changed his ways. (Actually, I’d fire him for good, but let’s go with the analogy.)

That’s basically what the U.S. has done by hitting China with a 145% tariff: we’ve imposed a trade embargo. China can’t trade with the U.S. at that level. And the U.S. can’t trade with China given the 125% retaliatory tariff they’ve imposed on us. Something’s got to give.

I’m going to end with a discussion of what effect tariffs have in the context of “King Dollar,” and I’ll wait to address the specifics of the Trump Administration’s plan in the next post.

Strategic, temporary tariffs used as leverage in trade negotiations to open foreign markets and target behaviors like dumping, IP theft, currency manipulation, and state subsidies can enhance long-term U.S. competitiveness without having an excessive adverse impact on global dollar circulation. The result can be new free trade agreements, and bilateral elimination or reduction of tariffs.

However, broad, long-term tariffs aimed at permanently reducing trade imbalances to re-industrialize will shrink the flow of dollars globally and weaken reserve status. The way it works is that those tariffs reduce imports, resulting in fewer dollars flowing abroad. This leads to less dollar liquidity for central banks to hold in reserve, for global trade to be settled in dollars, and for foreigners to buy U.S. assets.

That reduces the dollar’s status as a reserve currency, especially if other countries step in and try to create an alternative. The problem is that there is no viable alternative that could replace the dollar in the foreseeable future, so global financial markets could collapse. Even if there were a viable alternative, if the U.S. lost its status as the global reserve currency, it would also lose all of the benefits thereof, and it would take decades to re-industrialize, if it ever could, given the current regulatory framework, cost of labor, etc. We would no longer be the dominant economic player on the world stage, and we’d lose our geopolitical clout. Who would have the strength to impose sanctions on the bad actors? The world would be much less safe.

In summary, targeted, temporary tariffs can be a powerful tool in addressing Triffin’s Dilemma and increasing fairness in global trade. But broad, long-term tariffs cause far more harm than good. And that should provide some clues as to what’s coming in the next post.