What are tariffs? Donald Trump has been talking about introducing and increasing tariffs on goods and products imported into the USA.
Today, let’s take a deeper look at tariffs. We’ll talk about the definition of tariffs, real world examples, and the pros and cons of the US introducing tariffs!
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Vocabulary
- Tariff (Noun): A tax or duty placed on a specific class of imports or exports.
- The government imposed a 20% tariff on imported cars.
- Tax (Noun): A compulsory financial charge or levy imposed by a government on individuals or businesses.
- Income tax in the country increased this year to support healthcare.
- Import (Noun/Verb): Bringing goods or services into a country from abroad for sale or use.
- The company imports electronics from Japan.
- Export (Noun/Verb): Sending goods or services produced in one country to another country for sale.
- Brazil’s coffee exports are a major part of its economy.
- Good (Noun): A physical item that can be bought or sold; merchandise or products.
- The grocery store shelves were stocked with a variety of goods.
- Domestic (Adjective): Relating to one’s own country; not foreign or international.
- The government supports domestic businesses through subsidies.
- To impose (Verb): To establish or apply a rule, tax, or penalty in a forceful way.
- The new law imposes stricter regulations on waste disposal to protect the environment.
Donald Trump and Tariffs
At the beginning of November, Donald Trump was re-elected as the President of the United States of America. He will take over from current President Joe Biden in January, and I’m sure we are all curious about the policies and decisions he will make as leader of the US.
While we don’t exactly know what his final plan will be, Trump has suggested in some speeches that he will introduce a 60% tariff on imports from China and a 10% tariff on imports from other countries.
These tariffs will be linked with his tax policy. Trump plans to introduce big tax cuts in 2025, perhaps for both companies and individuals, and replace them with tariffs.
In fact, he has suggested cutting taxes even further for companies who manufacture products in the US instead of importing them from overseas. In other words, if you make and import products from overseas to the US, you will need to pay extra taxes, while if you make your product in the US, you will pay less taxes.
However, Trump’s tariffs plan has been controversial. And one of the big reasons for the controversy is that tariffs are a little bit confusing.
Today I want to talk about tariffs. We’ll discus what they are, how they work, who pays tariffs, and end with a discussion of the pros and cons of tariffs.
This will be a simple introduction to tariffs. I’m sure there are people listening to this podcast who have backgrounds in import/exports, running their own business, or studied economics. In the past I have studied tariffs from a political perspective many years ago, but I’m not an expert!
What is a Tariff?
Let’s start with the basics. A tariff is basically a tax places on goods (products, food, etc) as they cross a national border. Usually, it is paid when a good is imported into a country.
This means that when a product is shipped from one country to another, the importing country’s government may decide to add a fee to it, which is known as a tariff.
For example, if you are selling carrots in Poland, and someone in Brazil really wants to buy your carrots so you send a box of carrots, the government in Brazil might add a tariff to the carrots when it enters Brazil.
There are two main types of tariffs. Ad Valorem tariffs are based on a percentage of the item’s value. For example, if a country imposes a 10% tariff on imported cars, the tariff will vary depending on the price of the car. A $20,000 car would carry a $2,000 tariff, while a $40,000 car would carry a $4,000 tariff.
The other type are specific tariffs. Specific tariffs are fixed fees applied to the amount of something imported, regardless of the item’s value. For instance, a tariff of $0.50 per kilogram could be charged on the weight of imported goods, meaning that no matter the market price of the product, the cost remains fixed. It doesn’t matter if the carrots are worth $1 a kilogram or $2 a kilogram, the specific tariff is fixed.
Purpose of a Tariff
There are many different reasons why a country may decide to impose tariffs on imports from all or specific countries on different products and goods.
Historically, tariffs were a major source of revenue for countries. They were a way for a country to make money. We’ll talk about this a little later, but the United States government relied on tariffs for funding the government before they introduced income taxes.
Today, very few countries use tariffs for this purpose. Instead, the main goal of tariffs is often to protect domestic industries from foreign competition. It works by making imported goods more expensive, so people are more likely to buy locally made products.
If a car made in the USA costs $10,000, but a similar car made in Korea costs $8000, many people may be interested in buying that cheaper Korean car. However, if the US government decided to put a tariff of 25% on the Korean car industry, then both cars would be the same price, and more people would buy the American made car. At least this is the basic idea.
The goal is to support domestic jobs and businesses by encouraging people to buy things made in a country. This is sometimes called “protectionism,” as the goal is to protect a country’s economy from outside competition.
Sometimes tariffs are used as a negotiating tool in international trade. A government might impose tariffs to pressure another country into changing its trade practices or to gain better terms in a trade agreement.
For example, Trump introduced loads of tariffs on Chinese products during his last term as President, partly because he argued China wasn’t respecting the intellectual property of US companies (basically stealing designs) and was unfairly keeping prices low.
How Do Tariffs Work and Who Pays Them?
There has been a lot of confusion around how tariffs work and who pays them, especially on social media in the US. When Trump announced his tariff plans, many of his supporters believed it would mean that foreign companies would need to pay extra to sell things in the USA. This isn’t the case.
Let’s take a brief look at how a tariff works.
When a country imposes a tariff, the process generally begins at the border. Let’s say a U.S. business wants to import furniture from China. When the shipment arrives at a U.S. port, customs officials will apply the tariff rate. This tariff rate could be a percentage of the furniture’s total value (an ad valorem tariff) or a fixed cost based on the weight (a specific tariff).
The importing company pays the tariff at this point, and this payment goes directly to the government, contributing to its revenue. So it isn’t the foreign country or company that pays the tariff, it is the company importing the product.
While the importing business technically pays the tariff when the goods arrive, these costs are rarely absorbed by the importer alone. Instead, the added cost is typically passed down the supply chain.
When the tariff is paid, the cost of imported goods immediately increases for the importing company. For example, if a U.S. business imports $10,000 worth of furniture from China with a 25% tariff, the cost jumps to $12,500.
Importers then pass these extra costs on to retailers (the people selling the furniture). A furniture distributor in the U.S., for instance, might sell the furniture to local stores at a higher price to cover the added expense from the tariff.
Eventually, this markup reaches consumers, who end up paying more for the same product. In this way, consumers, rather than importers or retailers, often bear the real cost of tariffs. That $1,000 sofa may now cost $1,250, impacting household budgets across the country.
Tariffs can also affect industries beyond just those directly targeted. For example, if tariffs make certain raw materials more expensive, companies that rely on these materials might have to raise their prices as well.
In some cases, companies may choose not to pass on the full tariff cost to customers. If a business believes that raising prices could reduce demand for their products, it may absorb part of the cost to stay competitive. However, this approach is not sustainable in the long term, especially for small and medium-sized businesses.
Tariffs in the Real World
From Tariffs to Free Trade
So far everything I’ve talked about has been hypothetical, but how about tariffs in the real world?
Before income taxes were common, tariffs tended to be one the main sources of government revenue, especially in countries like the United States. In the early days of the U.S., customs duties and tariffs funded the government almost entirely, covering expenses from national defence to infrastructure projects.
For much of the 18th and 19th centuries, tariffs were used not only to generate revenue but also to encourage domestic production by making foreign goods more expensive. This continued into the 20th century.
One of the most famous tariff policies in the US was the Smoot-Hawley Tariff Act of 1930. The act was passed during the Great Depression and imposed high tariffs on a wide range of imported goods in an effort to protect American industries and jobs.
However, the move backfired.
Other countries responded with their own tariffs, leading to a decline in international trade. Many economists believe that the Smoot-Hawley Act worsened the global economic downturn by creating a cycle of protectionism, where countries kept raising tariffs in response to each other, hurting industries and consumers worldwide.
After it became clear that tariffs could cause major damage to economies, many countries and economists started to advocate for “free trade” – trade without tariffs.
The General Agreement on Tariffs and Trade (GATT) was formed in 1947, which aimed to reduce tariffs and trade barriers among participating countries. Through a series of meetings, GATT member countries agreed to gradually lower tariffs and other trade barriers.
The World Trade Organization (WTO) was created in 1995. The WTO expanded on GATT’s mission, providing a place for countries to resolve trade disputes and further reduce tariffs.
There were also more specific free trade agreements between groups of countries that aimed to get rid of tariffs. The North American Free Trade Agreement (which was replaced by the United States-Mexico-Canada Agreement) eliminated most tariffs on trade in North America, Comprehensive and Progressive Agreement for Trans-Pacific Partnership promotes free trade across Pacific countries in the Americas and Asia (Trump famously pulled the USA out of this agreement during his last term as president).
The most famous example of free trade is the European Union, which went even further than other deals by creating a customs union and single market which allowed for the free movement of goods, services, and people across borders without tariffs or restrictions.
Trump’s Previous Tariffs
Trump has a track record of introducing tariffs during his last time as president.
In 2018, the U.S. imposed tariffs on billions of dollars’ worth of Chinese goods, targeting products like electronics, machinery, and textiles. These tariffs were intended to address what the U.S. saw as unfair trade practices by China, including intellectual property theft.
China responded by imposing tariffs on U.S. goods, particularly agricultural products. This hurt American farmers, especially those exporting soybeans and pork.
Also in 2018, the U.S. imposed tariffs on imported steel (25%) and aluminium (10%) from various countries, including allies like Canada, Mexico, and the European Union. The rationale was to protect U.S. steel and aluminium industries, which were seen as vital for national security.
In response, several countries imposed tariffs on American exports, including whiskey, motorcycles, and food products. For instance, the EU’s tariffs targeted products important to U.S. states that supported the administration’s policies, making this a targeted form of retaliation.
Pros and Cons of the U.S. Introducing More Tariffs
The potential reintroduction or expansion of tariffs in the U.S. is currently a topic of heated debate, both in the US and around the world. In fact, I was just reading this morning articles quoting UK politicians on how they plan to deal with Trump if he introduces tariffs on the UK.
Let’s take a quick look at the major arguments for and against increasing tariffs in the US, starting with the pros!
Pros of Introducing More Tariffs
One of the main arguments for tariffs is that they can protect American industries from foreign competition. By imposing tariffs on imported goods, the U.S. can make these goods more expensive, encouraging consumers and businesses to buy American-made products.
This helps support domestic industries and could prevent further job losses in sectors like manufacturing.
Tariffs can also be a tool to correct trade imbalances, where the U.S. imports far more than it exports to certain countries. By making imported goods more expensive, tariffs aim to reduce the volume of imports and encourage domestic production, potentially helping to balance trade with countries like China
For example, the U.S.-China trade war in 2018 was partly driven by the U.S.’s large trade deficit with China. The US buys a lot more from China than it sells to China. Tariffs on Chinese goods were intended to reduce the number of Chinese imports.
Some also believe it will encourage foreign companies to lower their prices as well to maintain access to the US market.
Tariffs can serve as an additional revenue source for the U.S. government, especially if they are expanded to cover a wide range of goods. Trump has used this argument often and has suggested that he will increase tariffs to fill the hole left by tax cuts.
Cons of Introducing More Tariffs
On the other hand, there are many drawbacks to increasing tariffs.
One of the biggest downsides of tariffs is that they lead to higher prices for consumers. When tariffs are applied to imported goods, companies often pass on these added costs to consumers, making everyday items more expensive.
Tariffs don’t just impact consumers; they also raise costs for American companies that rely on imported materials or components.
Even if US companies decide to stop importing goods and start manufacturing their products domestically in the USA due to tariffs, they may still have to pay tariffs on parts, components, or the raw materials.
Companies then have a choice – raising their prices (which may lose customers) or keeping the prices the same (but this puts extra strain on businesses).
Modern industries rely on complex global supply chains. A car made in the US may require parts to imported from China, metal from Europe, and computer chips from Taiwan. When tariffs disrupt these chains, businesses will face difficulties sourcing materials, and production timelines can be delayed.
Also, tariffs are not normally just accepted by other countries. When the U.S. imposes tariffs, other countries often respond by imposing tariffs on American goods, leading to a trade war. This can harm American exporters who rely on selling products to other countries. It can also harm relationships with other countries.
Final Thought
Donald Trump plans to introduce and expand tariffs on goods imported into the USA. We don’t yet know the full extent of this plan, but whatever happens it will have consequences for businesses and consumers around the world.
Today I have tried to explain tariffs. We talked about the defintion and history of tariffs, how they work, and some real-world examples. Then, I ended with a quick summary over the pros and cons of the US introducing tariffs.
What do you think? Do you think increasing tariffs is a good idea? Or do you think that free trade is a better solution?
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