What Are Tariffs?
Tariffs are taxes on imports and effectively raise the prices of imports, providing an edge to domestic companies in the same markets. Governments usually impose tariffs to boost domestic companies or to punish foreign competitors for unfair trading practices.
Key Takeaways
- Tariffs are a tax on imports paid by importing companies in the country that imposed the tax.
- Tariffs are meant to protect domestic industries by raising prices on competitor products.
- Tariffs typically raise prices for consumers.
How Tariffs Are Used
Tariffs are usually used to protect struggling domestic industries against foreign competition or unfair practices such as dumping and foreign government subsidies. Two basic types of tariffs include:
- An ad valorem tax is the most common type and is levied as a percentage of the value of the good or service.
- A specific tariff sets a fixed fee by weight or number of items.
Tariffs are paid by the importing businesses to their government, with most costs passed on to consumers of those goods or services. Tariffs are not paid by foreign companies, the exporters, or the governments that produce the goods.
The United States has an average import tariff rate of 2% on industrial goods, while one-half enter the United States duty-free.
Consumer Prices
Tariffs can have unintended consequences. In their attempt to promote domestic industries, tariffs hurt domestic consumers since a lack of competition increases prices.In 2018, the Trump administration imposed large-scale tariffs on several goods to protect U.S. manufacturers from foreign competition.
Washing machine tariffs revealed how import taxes can raise consumer prices on more than just the targeted imports. Research by the University of Chicago and the U.S. Federal Reserve found that while the washing machine tariffs brought in $82 million a year to the U.S. Treasury, the cost to U.S. consumers was $1.5 billion a year.
U.S. producers raised their prices on washing machines and other goods. The Fed concluded that the washing machine tariffs helped create about 1,800 manufacturing jobs, but the cost to the U.S. was about $817,000 per job.
Imposing Tariffs
Steel tariffs were imposed in 2018 to penalize China for unfair trading practices due to government subsidies that had enabled Chinese producers to export steel at low prices. Tariffs of 25% were imposed to protect the domestic industry, including factory jobs in important "rust belt" swing states such as Pennsylvania.
Those tariffs helped U.S. steelmakers but forced many U.S. companies that needed steel for their products, especially automakers, to pay higher prices, threatening products and jobs downstream.
Do All Countries Impose Tariffs to Protect Domestic Goods?
Most countries maintain at least small tariffs on some goods, especially ones of special domestic importance. The U.S., for example, still keeps a tariff of 25% on light pickup trucks, while the European Union maintains a 10% import tax on cars from the U.S. and other countries.
How Do Economists View the Use of Tariffs?
Most economists believe tariffs hinder trade and economic growth while raising prices for consumers in tariff-implementing countries.
What Are Trade Agreements?
Trade agreements between countries help to open markets, expand opportunities for U.S. employees and businesses, and help companies enter and compete in the global marketplace.
The Bottom Line
Tariffs have historically been a tool for governments to collect revenues and protect domestic producers. Many economists argue that tariffs create market distortions that can harm domestic consumers over time through increased prices and reduced competition.
