If you are going to debate the wisdom of Tariffs, make sure you understand them first!
People often use or hear terms that they do not fully understand. One of these is the term “Tariffs.”
Tariffs are paid by the importer based on the wholesale price of the product as delivered by the exporting country depending on the exporters’ tariff rate. Tariffs are not levied or paid based on the retail price of the product as sold to the consumer.
Example: Consider a pair of Denim Jeans made in China for Guess Brand. The Chinese manufacturer sells the jeans to Guess Brand for $10 a pair manufactured. Guess sells the jeans at retail in the USA for $100 (a $90 gross profit). A 50% tariff on China means the jeans cost Guess Brand $15 instead of $10 (an $85 gross profit). A 50% tariff on Guess brand jeans, that retail for $100, changes the cost to the retail brand by $5, or $105.
It is up to the importer/purchaser whether to absorb that cost or to pass it on to the consumer. The purchaser must decide what is in the best interest of the company: keep the price the same, raise the price by $5 and lose some sales, or split the difference. If the tariff is in the news, some retail companies may even up their price for a windfall, just to blame it on the tariffs (i.e. president Trump.)
Multinational corporations who have off shored their production and manufacturing to China are the ones screaming about tariffs. Ultimately in the final analysis, President Trump is exposing corporatism, multinational corporate vultures; he is not necessarily just exposing China.
In the example above thReasonse company makes $85 gross profit as opposed to $90 gross profit on the pair of jeans if they do not raise the retail price. They don’t raise the price because their profit margins are already ridiculous, and that’s why consumer prices do not go up. A 50% direct tariff on Chinese goods only marginally hits the multinational corporation. American consumers need to understand this dynamic better.
There are two types of tariffs
- Ad valorem tariff: A percentage of the value of the goods, such as 10% of the product’s price.
- Specific tariff: A fixed fee per unit of the good (e.g., $5 per item).
Why are tariffs used?
- Raise Government Revenue: Tariffs generate income for the government.1
- Protect Domestic Industries: By making imports more expensive, tariffs give an advantage to local producers, shielding them from foreign competition.2
- Correct Trade Imbalances: Tariffs can be used to reduce the amount of imports and address trade deficits.
- Political Leverage: Sometimes, tariffs are used as a tool in trade negotiations or to pressure other countries on political issues.
In short, tariffs are taxes on imports that raise government revenue and protect domestic industries, but they also raise prices for consumers, can hurt economic growth, and often trigger retaliatory measures from trading partners.
