What Are TARIFFS, And How Do They Affect You

Tariffs. The term has become completely impossible  to avoid in the news lately, and you’re not alone if it’s left you scratching your head. What  is a tariff?

How do they work? Who pays them? And how will the US’ potential new tariff  platform affect you in your day to day life?

You don’t need a degree in Economics to  understand all this - you just need to sit back and pay attention to this  episode of The Infographics Show, and you’ll understand exactly how  all this will impact your wallet. So, let’s start with the basics: What are tariffs? Thankfully, it’s not actually that  complicated.

Tariffs are a special tax placed on imported goods from other  countries. They’re added directly to the price of the goods as the import takes place.  But what does that mean in practical terms?

Let’s say you’re in the market for a new car,  and you can’t decide whether you want a BMW, imported straight from Germany, or a Chrysler  from right here in the US of A. The prices of the cars themselves are competitive, but why do  you end up paying more for the imported Beamer? It might be because of a tariff on imported cars.

But maybe we need to think a little bigger than  that. Maybe you’re not an average consumer, maybe you’re a company based in Silicon Valley, ready to create the next big thing in tech.  But to do this, you’re probably going to need microprocessors - they’re required for everything  from smartphones to washing machines, after all.

Taiwan isn’t just an island in the Pacific-  it’s the microchip capital of the world, responsible for over a third of all global  production. But if there’s a tariff on tech from outside the US, the costs might  rise so high that your tech company will need to start exploring deals to  build microchips right here in the U. S.

This is how tariffs can affect not only  whole products made outside the US - like the BMW - but items manufactured in the  US that are made from parts from abroad, like the ambitions of our tech company. Still with us? Good, now let’s take a  closer look at why countries use tariffs, because this is crucial to understanding why  a government might want to put them in place.

There are three reasons why a government  might choose to impose a tariff- revenue, protecting domestic businesses, and as a  political incentive against another country. Revenue is the most straightforward of the  three. The government wants to collect taxes to fund its own initiatives.

So a higher tax on  imported goods makes for more government revenue- especially if the tariffs aren’t high enough to  force companies to shift to U. S. -based production.

But if the taxes are severe enough that  domestic companies consider a change, then the tariff might have been imposed  to help protect domestic workers and manufacturers. The rise of economic  globalization has led to a lot of US industries- from tech to textiles- outsourcing  their manufacturing work to other countries, often in Asia. This not only encourages  unethical labor practices like sweatshops to keep the manufacturing costs low, it also ends  up affecting workers and companies in the US.

Take, for example, the automotive industry  that was once the lifeblood of Detroit, Michigan. Outsourcing automotive manufacturing,  the move towards automation, and the increasing popularity of foreign cars moving into the  US auto market, had a ruinous effect on D-Town. Theoretically, imposing stronger tariffs  would have helped both companies and consumers support domestic automakers, and prevent  their jobs from being outsourced overseas.

And then there’s the strategic political  element. Tariffs might be a tool to help address a trade imbalance, also known as a trade  deficit. This is a situation where a country is importing more than it’s exporting, meaning it’s  perhaps built an overreliance on foreign goods.

However, trade deficits aren’t necessarily a terrible thing. The US has actually  run on a trade deficit since the 1970s, and the impacts of this rarely have considerable  effects against the average consumer. But still, if a government wants to  address a trade deficit manually, then tariffs are a pretty good start. 

Making it more costly and inconvenient to import parts and goods encourages  consumers to shop local when they can, giving exports a chance to keep up while imports  falter. But this is an internal political strategy. What if you want to use tariffs to  affect other countries with economic leverage?

Tariffs can be used punitively, somewhat  like a less severe approach to an economic sanction where trade with a sanctioned  country is outright forbidden. Increasing tariffs against a particular country’s  imported goods can hurt them economically, and this could be used as a bargaining chip  for wider trade or political negotiations. We’ve often seen this between the  US and China from 2018 to 2020.

So that’s what a tariff is, and a few  reasons why a country might use them, but there are a few much more serious and  important details we need to get into now. How do these tariffs actually work? Who do the  extra costs get passed onto?

And how might some of the planned tariffs we’re seeing in  the news right now affect your wallet? First, let’s address the “how. ” Let’s  look at two different types of tariff, and how they work.

Type Number One are  specific tariffs. This is a fixed extra fee applied to an import, which will stay the  same regardless of how much that import costs. Let’s return to that BMW you were thinking about  importing.

If the government imposes a $2000 specific tariff on auto products from  Germany, you’ll be paying two grand whether you’re buying a $40,000 BMW X1  xDrve28i SUV or a $120,000 BMW M850i. So that’s specific tariffs. Then, there is  the other type- ad valorem tariffs.

These added costs are expressed as a percentage  of the value of the goods. For example, a 10% tariff on fruits and vegetables  grocery companies import from abroad, keeping the tariffs proportional  to the specific goods. At first glance, tariffs might seem like a  win-win- they protect local jobs and reduce dependence on foreign economies.

But the reality  is tariffs can have a hidden side. Despite their good intentions, they often come with unintended  consequences that can ripple through industries, raising costs and impacting consumers  in ways we don’t always expect. One of these consequences is making  domestic industries worse.

Without the competition of international  trade to keep them on their toes, domestic companies might become an oligopoly less  accountable to the demands of their customers. After all, it’s not like they  can just go and shop elsewhere. Less competition can also have another nasty  effect for consumers.

Without competition, no competitive pricing, meaning that  consumers don’t even end up saving money. On an international scale, like any political  strategy, tariffs as a means to exert economic leverage on other countries could backfire.  Rather than getting the concessions they want, the other party might impose tariffs  right back in retaliation, resulting in a trade war that ultimately  just hurts both parties at once.

We saw this again from 2018 to 2020,  when the US imposed heavy tariffs against goods from EU member states  and China. This resulted in a number of retaliatory tariffs against US products  from bourbon to Harley Davidson Motorcycles. But what does getting “hurt” by a tariff actually  mean?

To answer that question, we need to give ourselves another. When tariffs get imposed on  goods, who actually ends up footing the bill? Well, to put it simply, you do.

That’s right. It’s a huge  oversight to think that the country exporting goods ends up paying extra  for imports. The purpose of tariffs is to make foreign goods more expensive  for you, the consumer.

It’s a way to disincentivize you from buying those foreign  goods, and instead shopping domestically. This sounds like a pretty  simple plan in an ideal world, but a quick look out your window and at your  bank account reveals none of us live in an ideal world. Lower income consumers are  often the ones most impacted by tariffs.

They’re already working with more limited  options for where they can shop for basic necessities - including everything from  food to bottled water to toilet paper. If the more affordable foreign goods end  up being made more expensive by tariffs, people without much money to spare  will end up paying more either way. You might think that small businesses would  benefit from a rise in tariffs, compared to huge multinational companies that heavily  invested in international manufacturing.

Well, the truth isn’t actually that simple. In our  modern globalized economy, small businesses may be just as likely to benefit from imported  goods and parts. Without the same resources as their larger counterparts, a sudden rise in  tariffs might throw their business into disarray.

Tariffs might sound simple in theory,  but in practice, the gap between their intended benefits and actual impact can be  significant. We’ve already discussed the theory at length here, but let’s take a look  at the practice for consumers and businesses. For consumers, a sudden spike in the price of  imported goods can feel like inflation with no escape.

In regions of the U. S. that  are heavily reliant on these imports, they’re often left footing the bill if domestic  alternatives aren’t already available.

Without the infrastructure to support replacements, many  are simply forced to absorb these higher costs. And what about the businesses that need  to acclimate to a high-tariff world? They’re left with only three options.

The  first is to carry on as normal and simply swallow the costs. This is inconvenient but  doable for larger companies and potentially ruinous for smaller ones. The second option is to  increase prices in order to maintain profit.

This, obviously, doesn’t benefit the consumer either,  because they end up swallowing the costs. The third option is to uproot their  current business practices and try to find a domestic supplier, which will  be both complicated and time-consuming. This brings us all the way back to  the most important question of all: How will the proposed new US  tariffs affect the consumer?

As we mentioned earlier, the United States  has run on a trade deficit since the 1970s. It’s a country that relies heavily  on imported goods. In fact, in 2023, the US actually imported $3,100 billion  worth of goods.

This made up around 11% of the country’s Gross Domestic Product. That  same year, tariffs brought in the government revenue of $80 billion, which accounted for  only about 2% of their overall tax revenue. The most popular imported goods include crude  petroleum, cars, broadcasting equipment, computers, packaged medicaments, motor  vehicle parts and accessories.

There’s also refined petroleum, vaccines,  blood, antisera, office machine parts, and integrated circuits. All things that the  US would benefit from reliable access to. The planned tariffs range from a 20% ad  valorem tax on general imported goods, a 60% tariff on Chinese goods, and even a  200% tariff on foreign autos.

So you can kiss that BMW goodbye unless you’re willing  to pay twice its price on the tariff alone. In the interest of fairness, one  possible outcome of these tariffs is a boost to domestic production. And  if the foreign exporters are desperate to keep their customers in the United  States, they could lower their prices significantly to offset the potential  price hike from the imports.

However, while this isn’t impossible, it’s highly  unlikely based on tariff precedents. Between 2018 and 2020, when tariffs  were hiked across the board, studies into the matter have shown that  the costs were ultimately passed onto the consumers rather than improving  the life of the average American. Will things be different now?

Well, the  University of Chicago asked a panel of economists whether they agreed with the  statement “imposing tariffs results in a substantial portion of the tariffs being  borne by consumers of the country that enacts the tariffs, through price  increases. " 98% of them agreed. The Peterson Institute for International Economics  suggested that the proposed tariffs would lower the income of the poorest portion of Americans  by 4%, and even the wealthiest Americans by 2%.

And if that wasn’t a bad enough deal already,  multiple economists have speculated that the tariffs will cause another spike in inflation.  Not to mention that things will get even worse if some of the affected countries which have  considerable trade relationships with the US, like China or Mexico, decide to institute  retaliatory tariffs of their own. Claims that the tariffs will protect  US manufacturing jobs also don’t seem to hold water either.

In 2018, the US  introduced a 25% tariff on imported steel, but over the course of the tariff’s employment,  a net 4,000 jobs in steel were still lost. The rise in American steel prices didn’t just  affect steel producers- it sent shockwaves through other industries that rely on  steel for manufacturing. From carmakers to construction firms, many were hit with  soaring costs, and the result was painful.

There were job losses across the board as  businesses struggled to stay competitive Even if you’re not buying expensive imported  cars or importing steel for factories, you’re still likely to feel the pinch at your  local grocery store. Common ingredients like garlic are often imported from China, which  will be heavily impacted by the 60% proposed tariff. Supply chain issues and lack of  availability will likely follow while new trade partnerships are brokered, and  because of the lack of competition, you might still experience higher prices  even when new supply chains level out.

Whether any of this will make the US government change course on their tariff plan,  we’ll just have to wait and see. Are these proposed tariffs a smart move or a risky gamble? Think they’ll help or hurt us? 

Leave your thoughts in the comments! Now check out “What You Need to Do to Prepare for  the Upcoming Recession”, or watch this instead!