US-China Tariffs and Consumer Prices
Introduction to Tariff Policies
What Are Tariffs?
At its core, a tariff is a tax. But instead of taxing income or property, it's a tax placed on goods imported from another country. When a product arrives at a country's border, the government charges a fee before it can enter the market.
Tariff
noun
A tax or duty to be paid on a particular class of imports or exports.
Governments use tariffs for two main reasons. First, they can protect domestic industries from foreign competition. By making imported goods more expensive, tariffs encourage consumers and businesses to buy products made in their own country. Second, tariffs generate revenue for the government, just like any other tax.
Types of Tariffs
Tariffs aren't one-size-fits-all. They come in a few different forms, depending on how the tax is calculated.
An ad valorem tariff is a percentage of the imported good's value. If a 💲1,000 television has a 10% ad valorem tariff, the tax is 💲100.
The term ad valorem is Latin for "according to value." This is the most common type of tariff. The more expensive the item, the higher the tax.
A specific tariff is a fixed fee based on the quantity, weight, or volume of the imported good. For example, a country might charge a tariff of 💲500 for every ton of steel imported, regardless of the steel's market price.
Finally, a compound tariff is a mix of both. An importer might have to pay a fixed fee plus a percentage of the item's value. For instance, an imported car might face a tariff of $1,000 plus 2% of its value.
How Tariffs Work
When a shipment of goods arrives in a country, it must pass through customs. Customs officials are responsible for inspecting the goods, determining their value, and applying the correct tariff. The importer must pay the tariff before the goods are released and can be sold.
The immediate effect of a tariff is an increase in the cost of the imported product for the company bringing it in. That company then has a choice: absorb the extra cost and make less profit, or pass the cost along to consumers in the form of higher prices. This is why tariffs are often described as a tax on imports that can ultimately be paid by consumers.
Tariffs function as a tax on imports, with much of the cost ultimately passed through to consumers.
By making foreign products more expensive, tariffs can make domestically produced goods seem more attractive. This is the 'protectionist' aspect of tariff policy. The goal is to shield local businesses and workers from what a government might see as unfair competition from abroad. They can also be used as a tool in international negotiations, giving a country leverage to secure better trade terms with its partners.
What are the two primary reasons governments implement tariffs?
An ad valorem tariff is a tax calculated based on the ________ of the imported goods.
Understanding what tariffs are and how they're applied is the first step in seeing their wider impact on prices, businesses, and the global economy.