Tariffs, Tariffs, Tariffs

What are tariffs and should they matter? In the simplest terms, a tariff is a form of tax placed on goods and/or services that come into one country from other countries. It is an additional cost added to certain goods and services imported into the country.  However, before digging deeper into tariffs, it is important to understand how they are used in the U.S. and what the impact is, if any, on taxpayers.

At the end of 2023, the U.S. was the world’s second-largest trading nation behind China, with over $6.8 trillion worth of goods and services imported and exported with 200 countries. With a total of $3.8 trillion, the U.S. was the largest world importer of goods and services. In 2023, the U.S. imported $3.1 trillion in goods from other countries, with Mexico being the top import partner at $476 billion and China being the second largest at $425 billion. As for services, at the end of 2023, the United States imported $748 billion in services. In 2022, $350 billion in imported goods and services were impacted by tariffs.

When it comes to tariffs, the United States is not the only country to use them; they are used around the world. Most countries trade freely among each other due to free trade agreements. The agreement is a treaty signed between two or more countries to reduce trade barriers and promote stronger trade ties. Even with this agreement, countries still find it necessary and beneficial to use tariffs. Some of the reasons are listed below.

Positive Uses:

#1 To protect domestic producers

Governments want to safeguard domestic industries that may experience problems from cheaper imported goods from foreign competitors. 

#2 To protect domestic consumers

cheap imported goods may pose risks. For example, these goods may contain elements that could harm consumers. By making the goods more expensive, the government discourages their excessive consumption. Examples of this include fake and counterfeit products, pharmaceuticals, and cosmetics made with harmful materials.

#3 To preserve national security

The government may want to protect strategically significant industries from over dependence on imports. In this case, tariffs are primarily placed on imports to restrict the sale of important technologies, information, and services to foreign individuals, companies, and governments. 

#4 To protect infant industries

The government may support emerging and growing sectors. This will attract more consumers to domestic products, and the growth of companies in these emerging industries will be stimulated.

#5 Revenue to the imposing government

The tariffs (taxes) are paid to the government 

The two main types of tariffs that are commonly used:

• Ad Valorem: A percentage of the value of the imported goods (e.g., 2.5% on automobiles).

• Specific: A fixed amount based on the quantity of the imported goods (e.g., $0.51 per watch).

  
  

It is important to know that past U.S. Presidents have used tariffs at some point and time . In 1789, the first act of the first U.S. Congress was to sign The Tariff Act of 1789 into law. Back then, the main purpose of tariffs was to generate revenue for the government. However, revenue generation is not the main purpose today. . Tariffs can be used long-term, or in some cases, deals can be renegotiated, and the tariffs removed. Below is a chart of tariffs issued in the past eight years between Trump and Biden.

Major Tariffs Imposed by Trump and Biden

*Country agreed to a quota limit in lieu of tariffs.

Sources: Congressional Research Service; CFR research.

So, if tariffs increase the cost of certain imported goods and services, who pays that cost? The consumer! The importing companies pay the tariff amounts to the imposing government. However, the increased cost to the company is, in most cases, passed along to the consumer. For example, if a pair of shoes from China costs $25 and then a $15 tariff is placed specifically on the shoes from China, the amount paid by the consumer will be increased by the tariff amount. That is a 60% increase that the consumer will pay. In 2023, $80 billion in tax revenue came from tariffs. When looking at the negative impact of tariffs, the additional cost to the consumer is notable. Other negative impacts to consider are listed below. 

Negative Impact:

#1 Increase cost to consumers

The company that receives the imported goods, pay the additional cost of the tariffs that was imposed by the government. The money from the tariffs goes to the government.  However, the purchasing company then passes that cost on to the consumer.  

#2 Retaliatory counter-tariffs from other countries

If a country believes it is being targeted by another country with unreasonable tariffs, the exporting country will retaliate and impose tariffs on the goods being imported into its country. A great example of this was back in 2018 when the trade war between China and the U.S. started. In hopes of getting China to make changes to its "unfair" trade practices and alleged intellectual property theft, Trump set tariffs and other trade barriers on goods imported from China into the U.S. In retaliation, China imposed huge tariffs on agricultural products that the U.S. exported to China. This retaliatory action was devastating to U.S. farmers. Trump provided $61 billion in taxpayer aid to U.S. farmers.

# Potentially Inflationary

Depending on the economic environment, if too many tariffs are broadly placed on a significant number of imported goods and services, not only will consumers be burdened with higher costs, but the overall level of inflation could potentially rise significantly. This would not be good for the economy. 

Overall, tariffs are not necessarily a bad tool for governments to use. However, if not used with careful consideration and intent, they can do more harm than good. This is especially true for consumers, who will ultimately pay the higher costs.

By Ylanda T. Wilhite

Sources; Office of the United States Trade Representative, U.S. Department of Commerce, Congressional Research Service, Tax Foundation, Forbes, Bureau Of Economic Analysis, and Fordham Journal