Tariffs: What Are They & How Do They WOrk?

Audio version:

Coming Soon.

IMPORTANT VOCABULARY BEFORE READING:

tar·iff - 1. a tax or duty to be paid on a particular class of imports or exports

2. fix the price of (something) according to a tariff.

im·port - 1. bring (goods or services) into a country from abroad for sale.

2. a commodity, article, or service brought in from abroad for sale.

ex·port - 1. send (goods or services) to another country for sale.

2. a commodity, article, or service sold abroad.

cap·i·tal·ism - an economic and political system in which a country's trade and industry are controlled by private owners for profit.

What are Tariffs?

The word ‘tariff’ has been in the news a lot lately. It has probably been inescapable for the last few weeks if you follow any type of news or even just are on the internet. So, it’s probably good to know what that word means then, huh? Well, to put it simple, a tariff is a tax put on an imported or exported good or service. Essentially, it artificially makes something more expensive by a certain pre-determined percentage, in which the extra money is then put into the U.S. Treasury to be used by the government. Alright, great we know the basics…so then the question is…

How do Tariffs work?

Good question! So to explain them we’ll be using an example. Let’s say you want to buy a pair of Converse shoes. Converse are normally made in Asia. For this example, let’s say they can be made and sold for $10 to make a decent return on investment in Asia. However, in the U.S. the same brand or type of shoe can only be made for $15. Why is it more expensive? It can be for a lot of reasons. Either the materials needed to make the shoe, like the rubber or canvas, aren’t easily available or more expensive to get in the U.S. versus other countries. Which, funnily enough, they may be more expensive due to tariffs if they need or want to buy those materials from other countries. Also, things like labor will be in that cost. Certain countries have more or less strict labor laws, which means they may have to pay their workers more or less depending on where the shoe is being made.

Alright, we now got an understanding of how and why the shoes may have a price difference, even if they technically are the same shoe, made with the same material. Now, let’s apply a 100% tariff to the Asian Converse. This will then make the shoes $20 to buy in the U.S., ten of those dollars would be the tax, which the government would get. Now, all of sudden, the American made shoes seem like the better cheaper option being at $15. Which should incentivize people to buy locally, keeping the profit and money here and helping out local businesses. It’s also to try to help drive competition by making trade fair or making businesses try to make their products as cheap as possible for the consumer. Plus, hopefully they’ll encourage people to bring the means of production of necessary parts or products to the U.S. so we can make everything here. Sounds great and amazing, right? Well in practice, it’s not that simple.

Credit: Julie Bang © Investopedia 2019

Unfortunately, with how the world works, certain resources are only available or abundant in certain parts of the world. Which means the only or best option will always be to get those things from those places. Plus, certain companies will make the best or better product, that most people will want to us in the own products to insure they have highest quality product possible. A good example is he computer chips that are made in Taiwan are the only place in the world to get chips that fast and small. In these circumstances, any tariffs put on these products or resources will always just hurt the producer or consumer on how much something will cost. Making things more expensive than they need to be.

Made in Taiwan printed on the surface of a circuit board.

Credit: Marcus Harrison - technology / Alamy Stock Photo.

Plus, this scenario doesn’t talk about greed and good old capitalism always wanting that green profit arrow to go up. Just because they could sell the American made shoe at $15 and still make a good profit…doesn't mean they will. If the foreign shoe has to be sold at $20 now to offset the tariff cost, the American company can simply raise their price to just $19 and still look like the better cheaper version, even though the shoe is still really only worth $15…and technically only worth $10 in it’s cheapest form. This is where, in a lot of scenarios, tariffs just make the consumer pay more for less for basically no reason at all.

SO WHY HAVE TARIFFS THEN?

If applied correctly and fairly, tariffs can greatly benefit a country in competition, production and economically. In theory, it could lower or get rid of some taxes for people due to the tariff taxes being collected making up the difference. They also are used to make sure products for countries that may be a security risk, aren’t the only or best option people use and go to, potentially comprising or letting those nations control all of a product. In practice though, for the average person - all you’ll notice is the products you buy becoming more expensive for seemingly no reason at all. Due to tariffs, this is the reason why most new “American” cars are sold at ridiculously high prices. It’s because they are either made in factories in other countries or a majority of the parts they use, come from other countries with tariffs which brings the cost of production up.

So are tariffs the solution to everything? No and they especially hurt us when applied to nations that are our closest allies, both geographically and politically. However, again, tariffs can and do help sometimes when used correctly. They just have to be used correctly…duh.

Anyways, that’s it for this article! Thank you for reading! Stay happy and healthy.