Tariffs Explained With Examples

Why Tariffs Raise Prices

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Tariffs are custom taxes that governments levy on imported and some exported goods. The tax is a percentage of the total cost of the product, including freight and insurance. Tariffs are also called customs, import duties, or import fees. In the United States, the U.S. Congress sets the tariffs.

Tariffs Explained

Tariffs work by increasing the price of the import. Those higher prices give an advantage to domestic products within the same market. They are used to protect a nation's industry.

But tariffs are a barrier to international trade. Other countries retaliate and impose their own tariffs. Over time, tariffs reduce business for all countries.

On average, U.S. tariffs are under 2% (as of data from 2017). Countries charge different tariff rates depending on the industry they are protecting. They also charge sales taxes, local taxes, and extra customs fees. Governments collect this at the time of customs clearance.

Countries waive tariffs when they have free trade agreements with each other. The United States has trade agreements with more than 20 countries. Smart U.S. businesses target their exports to these countries. They use trade agreements to execute an intelligent market entry strategy. Their foreign customers pay less for U.S. exports because they are tariff-free. 

The Harmonized Tariff Schedule lists the specific tariffs for all 99 categories of U.S. imports. It's called “harmonized” because it's based on the International Harmonized System. It allows countries to classify trade goods uniformly between them. The system describes 5,300 items or most of the world's trade goods. The International Trade Commission publishes the Schedule.

The HTS is a guide. The U.S. Customs and Border Protection is the final authority that determines the tariff. It is the only agency that can provide legal advice. It also helps in determining the classification of your import. 

Pros and Cons

U.S. policymakers go back and forth on whether tariffs are good or not. When a domestic industry feels threatened, it asks Congress to tax its foreign competitors' imports. It helps that sector, and that often creates more jobs. Growth in that industry improves workers' lives, but it also raises import prices for consumers. Tariffs always force a tradeoff between workers and consumers. 

Another disadvantage of tariffs is that other countries retaliate. They raise tariffs on similar products to protect their domestic industries. That leads to a downward economic spiral, as it did during the Great Depression of 1929

Examples of U.S. Tariffs

The following examples of U.S. tariffs illustrate how these import taxes function. They highlight their advantages and disadvantages throughout history.

On March 1, 2018, President Trump announced he would impose a 25% tariff on steel imports and a 10% tariff on aluminum. He did it to add U.S. manufacturing jobs. But the tariff has and will raise costs for steel users, like automakers. And they'll pass that onto consumers. 

The chart below shows a breakdown of U.S. trade with China, Canada, Mexico, and the European Union. This also includes both enacted tariffs and additional tariffs that President Trump has threatened to pass.

The president can act without Congress' approval only to curb imports that threaten national security. The Commerce Department reported that dependence on imported metals threatens U.S. ability to make weapons. The tariff hurts China the most. Its economy depends heavily on exporting steel to the United States. Trump's move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines.

In June 1930, the Smoot-Hawley Tariff raised already-high tariffs on agricultural imports. Its purpose was to support U.S. farmers who had been ravaged by the Dust Bowl. The resulting high food prices hurt Americans who were suffering from the effects of the Great Depression. It also compelled other countries to retaliate with their own protectionist measures. As a result, world trade dropped around 65%. Since then, most countries have been reluctant to impose tariffs.

In 1922, Congress imposed the Fordney-McCumber Tariff on imported products, especially agriculture. Legislators were responding to a glut of farm products. During World War I, European farmers couldn't produce. Other countries replaced their food supply. When the European farmers returned to production, it increased the food supply beyond global demand. As prices dropped, U.S. farmers complained.

On April 22, 1828, the federal government levied the Tariff of Abominations on most imports. It was designed to protect Northeast manufacturers. Instead, it hurt the South. It did two things by raising prices on imports. First, it increased costs for most goods. That damaged the agrarian South the most.

Second, it reduced trade with England, the South's primary buyer of cotton. When British businesses couldn't compete with New England manufacturers, they bought less cotton. As a result, the South's costs rose and its income fell. That's why Southerners called this tariff an abomination.

Opposition to the tariff helped elect Andrew Jackson to the presidency. He beat John Quincy Adams, who had approved it. Vice President John Calhoun drafted the South Carolina Exposition and Protest. It granted states the right to nullify any federal law they didn't like. In November 1832, the South Carolina legislature nullified the tariff. The action created a constitutional crisis over states' rights. In January 1833, the state backed down. But tensions remained high, contributing to the start of the Civil War.

The Bottom Line

Tariffs are taxes paid by consumers of imported goods. These raise prices of goods brought in from another country. Often, they are levied on products that compete with domestically produced ones. In effect, tariffs act as trade protectionist barriers.

Although tariffs aim to protect local industries, it may hurt the economy as a whole. Such trade restrictions cannot exist in free trade agreements. It also prompts other nations to levy retaliatory tariffs, reducing the volume of business with each other. 

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Article Sources

  1. Congressional Research Service. "U.S. Tariff Policy: Overview." Accessed Dec. 31, 2019.

  2. Congressional Budget Office. "The Effects of Tariffs and Trade Barriers in CBO’s Projections." Accessed Dec. 31, 2019.

  3. World Bank. "Tariff Rate, Applied, Weighted Mean, All Products (%)." Accessed Dec. 31, 2019.

  4. Department of Commerce International Trade Association. "Free Trade Agreements." Accessed Dec. 31, 2019.

  5. United States International Trade Commission. "Harmonized Tariff Information." Accessed Dec. 31, 2019.

  6. U.S. Customs and Border Patrol. "Rulings and Legal Decisions." Accessed Dec. 31, 2019.

  7. Congressional Research Service. "U.S. Trade Debates: The Case For and Against Trade Restrictions." Accessed Dec. 31, 2019.

  8. The White House. "Remarks by President Trump in Listening Session with Representatives from the Steel and Aluminum Industry." Accessed Dec. 31, 2019.

  9. U.S. Department of Commerce. "The Effect of Imports of Steel on the National Security." Accessed Dec. 31, 2019.

  10. Office of the Historian. "Milestones: 1921-1936: Interwar Period." Accessed Dec. 31, 2019.

  11. United States House of Representatives: History Art & Archives. "Tariff of Abominations: The Effects." Accessed Dec. 31, 2019.