What Are Tariffs And How Do They Work?
June 5, 2019
(Industry Intelligence Inc.)
– You’d be forgiven if you were confused by all the talk in recent months about tariffs. It can be hard to understand exactly what they are and what they do when proponents and critics of their recent use say different things. President Trump, for example, says the use of tariffs will bring other countries in line to give us better trade deals and/or pressure countries such as Mexico to fix the illegal immigration problem between the U.S. and its southern neighbor.
Critics, however, say that Trump is misrepresenting what tariffs do and how they work, and that ultimately the only thing tariffs will do is raise prices for American consumers.
So who is right? Who is wrong? Decide for yourself. Below is a breakdown of what tariffs are and what their purpose is:
What are tariffs?
Tariffs are a tax on imports. They're typically charged as a percentage of the transaction price that a buyer pays a foreign seller. In the past, the U.S. has imposed additional duties on foreign imports if the White House determines that the imports in question are either being supported by foreign government subsidies or sold at prices deemed unfairly low.
What are tariffs supposed to accomplish?
Tariffs are supposed to accomplish two things: Raise government revenue and protect domestic industries from foreign competition. In addition, tariffs are meant to increase the price of imports or to punish foreign countries for committing unfair trade practices.
Why have I never heard of tariffs until President Trump took office?
Because tariffs fell out of favor once global trade began expanding following World War II. Also, the formation of the World Trade Organization and trade deals like NAFTA reduced tariffs or eliminated them altogether.
Are tariffs a wise policy?
Most economists say no because tariffs drive up the cost of imports. Rising costs especially hurt consumers and companies that rely on imported components.
Additionally, many economists feel that trade restrictions make the economy less efficient. If you decrease the amount of international competition, domestic companies lose the incentive to increase efficiency.
Nevin Barich is the Consumer Products Analyst for Industry Intelligence, which can help YOU better address your own industry challenges. We invite you to come take a look at our service. Call us today at 310-553-0008 and we’ll schedule you for a 15-minute demo.