Trump's Tariff Exemptions Are Harmful Protectionism with More Holes than Swiss Cheese

Tariffs have been a staple of Trump's trade policy in both of his presidential terms. When politicians propose a tariff, they make it sound like this simple tax rate because they are presented as universally applied. However, reality intervenes in the form of political discretion. As recent research from the American Action Forum (AAF) shows, that discretion creates exemptions.

AAF found that the "Liberation" Day tariffs had an exemption rate of 38 percent. With the newer Section 122 tariffs, that rate went up to 60 percent. The wider exemptions under Section 122 reduced the effective tariff rate from 14 percent to 10 percent. 

You might be wondering why I think this is a bad thing. After all, tariffs are import taxes. If the effective tax rate is lower, you would think that is better for the economy. Think again! Cato Institute trade scholar Scott Lincicome details the hellish labyrinth that tariffs have become. Tariff rates do not vary only by product. They do so by country, by statutory authority, and how multiple tariff regimes interact. 

Because Trump is trying to use multiple statutory authorities to push his tariff agenda, he has increased the number of tariff regimes in the U.S. tariff code from 3 in 2017 to 17 in 2025. More to the point, the percent of imports being subject to a tariff went from 0.02 percent in 2016 to 49.2 percent in 2025.

This has made tariff compliance a legal and logistical challenge of Herculean proportions. Rates stack inconsistently, exemptions are applied unevenly, and the rules change frequently. Tariffs become a hidden tax because firms have to devote time, hire specialists, and navigate trade uncertainty. A Federal Reserve report last year estimated that the compliance costs are the equivalent of 1.4 to 2.5 percent ad valorem tariff. Given that 95 percent of tariffs on U.S. imports are paid by the everyday American consumer, guess who is ultimately paying the brunt of those compliance costs? 

But those costs are not distributed evenly. Large firms can afford trade lawyers, customs specialists, and representation in Washington to do the rent-seeking and earn the exemptions. Smaller firms generally cannot. The asymmetry creates a divide between those who can navigate the rules and those who cannot. What is even more amusing is that the exemptions are a tacit admission from the Trump administration that tariffs are too blunt and harmful. Plus, they undermine the administration's rationales for the tariffs, particularly the rationale about generating government revenue.

While advocated for as a simple, universal tax rate, tariffs are a complex behemoth that incurs additional costs to businesses. The irony is that a policy that is presented as being straightforward ends up being a convoluted, opaque system that benefits well-connected businesses while screwing over the American people the protectionists claimed to help.