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While the concept of tariffs have been in the news a lot more recently due to President Trump’s insistence on using them, not a lot of people really understand what they are or what they do. There is a lot of misinformation and miscommunication about what a tariff is, who it effects and how, as well as what purpose it can serve. To combat this, we’ve developed a quick and basic guide here.
Welcome to Tariffs 101
A tariff (also called an “import tax”) is an additional cost imposed by a government, state, or some other controlling national body on the imports of goods. This cost can be a fixed percentage or a per unit price on the items being brought in, or it could be a variable cost dependent on the price of the imported item. The whole purpose for using tariffs is to encourage citizens to buy local products instead of imports, which should stimulate the country's economy as well as incentivize companies to develop production locally instead of relying on foreign goods and services. It has also been historically used as a means to sanction other countries to discourage people from supporting their economies.
Who inevitably pays for tariffs is what seems to be confusing for a lot of people right now. While the initial cost of the import tax is paid for by the importer, this additional money spent is then transferred onto the consumer as prices rise to cover this added cost. Too many people forget that importers are businesses and need to make their own profits to continue functioning.
For example: A 10% tariff on apples causes the importer to raise the price of what is sold to grocery stores, bakeries, and restaurants. These businesses then turn around and raise the cost of apples, apple juice, apple pie, and anything else that is sold to the everyday people buying them because they need to maintain their own profits, too.
Want to learn more? The infographic below provides some more top-level explanations of tariffs and how they work.
Keypoint Intelligence Opinion
There is far too much uncertainty in relying on tariffs as the main driver of an economic policy. While they have a purpose and shouldn’t be ignored outright, tariffs are meant to be used as deterrents and discouragements for foreign goods and not a club to bludgeon outside nations into submission (as they are being used right now). This behavior only encourages retaliatory trade wars to emerge where import taxes are used as shots fired across the battlefield to wound and cripple various industries.
Another problem is that these import taxes can be more punishing towards consumers than anyone else. Using the apple example above, if people don’t want to pay these added costs, then the only other option is to buy local—but if your country doesn’t have apple orchards already, then it’s going to cost a lot of time and money to start them up to the point that local apples can support the demand. Or the market could dry up entirely as people decide to switch to the oranges they already grow in their country…
Either way, we (as a collective) need to get a better grasp on what tariffs actually are and what they can do before we can keep using them. Otherwise, we’ll find a tax for a tax will leave the whole world poor.
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