What Is a Tariff?: Effects of Import Taxes

FT Contributor
A metal plate had the words "United States tariff."
Reading Time: 4 minutes

In 2019, President Donald Trump’s tariffs with China made headlines during the trade war between China and the United States. President Trump imposed tariffs on a wide variety of Chinese goods, from textiles to tea and everything in between.

While the stated goal of these tariffs was to punish Chinese businesses and protect American interests, they had mixed consequences when it came to the domestic economy and consumers. So just what is a tariff, and how does it work?

In essence, a tariff is a tax on imported goods from other countries. Tariffs are often used to protect domestic industries, products, and jobs. Although tariffs have been implemented for centuries, recent trends point to an overall decrease in tariffs as worldwide trade and globalization have increased.

So how exactly do tariffs and trade wars affect the American economy? This guide will describe how tariffs work, how they affect consumers, and how to avoid the costs associated with them.

How Do Tariffs Work?

Tariffs are imposed in order to protect a nation’s economy by making imports less desirable. In practice, tariffs are often imposed on certain industries, such as automobiles or electronics.

Tariffs may be imposed because an industry is still nascent and developing, or because an industry is facing increased competition from foreign countries. These tariffs cause the price of imported goods to be higher, and may result in importers looking elsewhere for certain goods. Tariffs may also help to support domestic industry, keeping jobs and profits within the country.

Who Pays Tariffs?

While President Trump claimed that his tariffs primarily affected Chinese businesses, the reality is more complicated. The costs associated with the tariffs were passed onto domestic importers, who in turn passed these increases onto their own customers and, ultimately, the consumer.

Since importers did not stop purchasing Chinese-made goods because of unsustainably high prices, consumers usually ended up footing the bill. When tariffs are imposed and importers look for goods elsewhere to avoid tariffs, the prices still often end up being higher for consumers due to the increased cost of goods from other countries.

How Are Tariffs Collected?

Tariffs are collected by the U.S. Customs and Border Protection agency. Importers are required to calculate and pay a fee on any imported goods that are subject to a tariff, and may be subject to additional fees if they underpay. The United States can also blacklist certain companies from trade with America.

Where Does Tariff Money Go?

The United States brings in billions of dollars in tariffs each year, and a large percentage of that came from tariffs on Chinese imported goods. Because of there was a trade war with China, however, these profits aren’t as dramatic as they seem. In reality, the United States government had to issue several bailouts for industries particularly hard-hit by the trade war, including the farming and agricultural industries.

Negative Effects of Tariffs on You

Tariffs can affect consumers in a variety of ways. In particular, tariffs on imported goods often result in increased prices being passed onto the consumer.

The “Hidden Sales Tax” of Tariffs

Like sales tax, tariffs effectively act as an additional tax on goods for consumers. When tariffs are imposed on foreign countries, the government collects a tax on any imported goods before they enter the country. This means that domestic importers end up having to pay additional costs when they source products from outside the United States. Importers then pass these costs onto their own customers, and eventually onto consumers. Tariffs often result in American citizens paying more for imported goods than they otherwise would.

Reduced Variety of Goods

Tariffs can also disincentivize retailers from importing certain goods and disrupt certain supply chains. If the cost of paying the tariffs becomes too prohibitive, importers may decide to look elsewhere to source those goods. This can mean that there is a less diverse range of goods on the marketplace, as businesses may only purchase goods from countries without a tariff.

Higher Unemployment Rates

One of the stated goals when it comes to tariffs is often to protect domestic jobs in certain industries. While tariffs do sometimes protect jobs in these industries, they often result in a higher overall unemployment rate due to increased costs in related industries. For example, a tariff on imported steel might protect jobs in the steel industry, but might negatively impact jobs in other areas, such as construction.

Tips to Keep in Mind When Tariffs Are High

Tariffs impact consumers in many ways. While there’s often no avoiding the increase in prices that often accompanies tariffs on imported goods, there are a few tips to keep in mind to remain financially stable even in uncertain times.

Buy Local Goods

Local goods should be largely unaffected by tariffs, meaning that their prices will stay the same even as prices on other imported goods increases. Shopping local, American-made goods can also benefit the local and national economy, support small businesses, and increase job opportunities. Locally made goods are also often perceived to be safer due to stricter domestic regulations and a greater emphasis on quality.

Achieve Greater Job Security

During turbulent financial times, job security can be a powerful asset. If possible, you should try to remain a viable candidate in the modern job market. Developing your skills, forming professional connections, and always being on the lookout for new job opportunities can help you to weather economic downturns and recessions intact.

Increasing your income and staying on a budget can also help you make sure that you have a nice safety net to fall back on during hard times. Budgeting out your minimum expenses using an old-fashioned spreadsheet or a specially designed budgeting app can help you see where your money is going, what areas of your spending have increased, and where you could make cuts in order to save more.

While they are usually implemented to support industry and jobs within the country, tariffs often result in escalating trade wars and overall economic turbulence. However, shopping local, budgeting, and achieving greater job security can help you absorb the increased consumer costs associated with tariffs.

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