So What Are Tariffs, Exactly?
This article was originally published on the Choice Wealth blog page.
Definition: Imposed by the government, tariffs are taxes on goods that are brought into or sent out of the country.
Purpose: Governments use tariffs to control trade flows while supporting local businesses and raising revenue for the state.
Types of Tariffs
Ad Valorem Tariffs: These tariffs calculate their rates as a percentage of the product’s total cost (for example, if a product costs $100, then the tariff would be $10).
Specific Tariffs: Specific tariffs involve a set charge for each unit of imported goods that doesn’t vary with the product’s price, like $2 per ton.
Compound Tariffs: Compound tariffs integrate elements from both ad valorem and specific tariffs.
Why Do Governments Use Tariffs?
Support Domestic Industries: Tariffs make imported goods pricier, which leads consumers to prefer domestic products.
Generate Revenue: A country earns tax revenue by implementing tariffs on imported goods.
Regulate Trade: By setting tariffs, governments control import and export volumes, which helps maintain balanced trade relationships.
Retaliatory Measures: These measures are implemented against other nations to respond to unfair trade practices.
How Tariffs Impact Consumers and Businesses
Higher Costs: As tariffs increase the price of imported goods, businesses must frequently transfer these higher expenses to consumers.
Supply Chain Shifts: Businesses might choose to obtain materials from local suppliers or countries where tariff rates are lower.
Trade Tensions: Extended tariffs between nations often escalate into trade wars, which negatively affect worldwide economic systems.
Economic Growth: Domestic industries may benefit from growth in the long run due to the impact of tariffs.
Pros and Cons of Tariffs
Here are the Pros and Cons of tariffs. Understand that there are both positive and negative implications, depending on your point of view.
Pros
- Protects emerging or struggling domestic industries
- Encourages local job growth
- Helps governments collect revenue
Cons
- Increases consumer prices
- May strain international trade relations
- Limits product variety and availability
A Real-World Example
The U.S. government implemented import tariffs on steel and aluminum in 2018. These were meant to boost American manufacturers but instead led to increased expenses for businesses that depended on these materials. In turn, this impacted the automotive and construction industries. These tariffs were removed by an agreement between the U.S. and the European Union in 2021.
Key Takeaways
Trade tariffs act as powerful economic instruments that produce extensive economic effects. These measures defend local industries but may raise expenditures for companies and end users.
Global trade patterns are significantly influenced by tariffs. Businesses and consumers who understand tariffs’ purpose and effects may make knowledgeable decisions in today’s global economy.
If you’re wondering how tariffs could affect you and your financial plan, meet with one of our financial professionals.
Important Disclosures:
Content in this material is for educational and general information only.
This article was prepared by WriterAccess.
LPL Tracking #692400