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What are Tariffs?

Understanding the Impact of Tariffs on Consumers

what-are-tariffs
Did you know? Tariffs

Did you know?

Tariffs are commonly misunderstood as a simple solution for protecting domestic industries. In reality, they are a complex tool of trade policy that can have far-reaching economic consequences, which can be traced throughout America’s history.

What is a Tariff? How do they work?

A tariff is defined as a tax or duty imposed by a government on imported goods or services. For example, a company like Nike, which has the majority of its products manufactured outside of the USA, may face increased production costs due to tariffs on imported goods. When Nike imports footwear or apparel from overseas factories, the U.S. government may impose tariffs as a way to encourage domestic manufacturing and reduce reliance on foreign production. However, this tax is applied to imports, not exports, meaning the cost is incurred when goods enter the U.S. rather than when they are sold abroad. Ultimately, these costs trickle down to the consumer, often resulting in a significant spike in the price of these products.

Throughout history, America used tariffs in an attempt to protect domestic industries, promote economic growth, and secure jobs for American workers. By taxing imports, the U.S. aimed to make foreign goods more expensive, encouraging consumers to purchase locally produced items. But typically provided the opposite. For example, in 1964, the United States government imposed the ‘Chicken Tax,’ a 25% tariff on imported light trucks, including German vehicles, in response to a trade dispute over chicken exports. This tariff was intended to protect American automakers, but it ended up raising prices for U.S. consumers and distorting the competitive market for light trucks.

As a result, there was a significant impact on the U.S. automotive market, particularly for German manufacturers like Volkswagen and Mercedes-Benz. The Chicken Tax effectively made it more expensive for foreign automakers to import light trucks into the U.S., which led to increased prices for consumers and limited competition in the market. With this limited competition, corporate greed allowed for domestic manufacturers to price their vehicles much higher, knowing consumers had fewer alternatives. This lack of competitive pressure contributed to higher prices across the board, benefitting U.S. automakers but ultimately hurting the consumer.

Cause & Effect

Understanding the cause and effect of tariffs requires a case-by-case analysis. In 2018, the Trump Administration implemented tariffs on various imported goods, including steel and aluminum, aiming to protect domestic industries and reduce the trade deficit. However, these tariffs led to increased costs for U.S. manufacturers reliant on imported materials, resulting in higher prices for consumers. This could be directly seen with the appliance industry. Although foreign appliances faced hefty import taxes, domestic appliance manufacturers saw an opportunity to capitalize on the rising demand and higher prices. As a result, even American-made appliances saw price increases, which ultimately burdened consumers with higher costs across the board. In doing so, the consumer had to pay out an additional $1.5 billion due to these price hikes, further illustrating the economic consequences of tariffs on everyday products.

The Hawley-Smoot Tariff Act of 1930

The year was 1930, and the Depression was deepening its grip on the global economy. In response to rising unemployment and the growing economic crisis, the U.S. government, under the Hoover Administration, was looking for a way to protect American industries and jobs. One of the measures they implemented was the Hawley-Smoot Tariff Act, which raised tariffs on over 20,000 imported goods. The goal was to reduce foreign competition by making imported products more expensive, encouraging consumers to buy American-made goods. However, instead of stimulating economic growth, the tariff sparked retaliatory tariffs from other countries, leading to a dramatic decline in global trade. Prior to the Hawley-Smoot Tariff Act, unemployment was at a rate of 8%. In contrast, the Recession of 2007 saw unemployment peak at 10% in the U.S. However, the tariffs implemented by the Hawley-Smoot Tariff Act of 1930 had a far more severe impact, causing the unemployment rate to rise to 25%.

The protectionist policies, intended to shield American industries, ended up stifling international trade and triggering retaliatory tariffs from other countries. This led to further job losses, worsening the already dire economic situation and deepening the Great Depression.

Can Tariffs Really Benefit the Economy?

In theory, tariffs are designed to benefit the economy by protecting domestic industries, encouraging local production, and addressing trade imbalances. However, the real-world effects are more complex. Factors such as corporate decisions, changes in the labor market, and the nature of global supply chains can influence whether tariffs achieve their intended goals. While tariffs may offer some protection to local businesses, they can also lead to higher prices for consumers, reduced competition, and unintended consequences in other sectors of the economy. The challenge lies in finding the right balance between supporting domestic industries and maintaining a healthy, competitive market

Frequently Asked Questions

Frequently Asked Questions: Tariffs

Tariffs are taxes or duties imposed by a government on imported goods and services. The main purpose of tariffs is to make imported goods more expensive, thus encouraging consumers to purchase domestically produced goods. Tariffs can be used to protect local industries, raise revenue for the government, or address trade imbalances between countries.

Tariffs primarily affect consumers and businesses. Consumers bear the brunt of the impact through higher prices on imported goods, which can lead to inflation. Businesses that rely on imported materials or goods also suffer, as the cost of production increases. Industries in sectors such as manufacturing, automotive, and retail can be particularly vulnerable to rising costs due to tariffs on raw materials or finished products.

Although tariffs are imposed on foreign goods when they enter a country, the cost is typically passed on to consumers. Importers (businesses bringing in the goods) may initially pay the tariff, but they generally increase the price of their products to cover the additional cost. Therefore, consumers end up paying the tariff through higher prices for imported goods.

One of the most recent successful tariffs was the U.S. 1970s oil embargo response. During the oil crisis of the 1970s, OPEC imposed an oil embargo on the U.S., leading to skyrocketing oil prices. In response, the U.S. implemented tariffs and other measures to reduce reliance on imported oil, encouraging investment in domestic oil production and alternative energy sources. This helped stabilize the market, reduce dependency on foreign oil, and promote energy independence in the following decades.

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