By Deyan Nikolic
Recently Trump announced that tariffs will be applied to Mexico, Canada, and China, as well as global steel and aluminium tariffs of 25%. This is only one of many decisions he has made, but could have long-lasting impacts for the world’s economy. But none of that is why you’re reading this article; I assume you chose to read this article because you want to know what tariffs are. There are two main reasons for implementing a tariff. The first is a ‘protective tariff’ which aims to protect a domestic industry by pushing the cost of foreign goods up, and the second is a ‘revenue tariff’ which is a tariff implemented by the government to generate money. When it comes to the type of tariff that is being applied, there are four main types. We, however, will only be focusing on the ‘ad valorem’ tariff in this article.
Well, to start off, in its simplest form, tariffs are a type of tax applied to incoming goods from other countries. In most cases this tax is then passed on to the consumer, or in other words the people of the country that introduced that tariff, basically meaning that a tariff is another tax consumers need to pay. To go into a bit more detail, Trump said he would place tariffs of 25% on steel and aluminium, which in practice, would mean that a company importing $100 of steel into the US would have to pay a further $25 in tax which the company would then pass onto the consumers, making the steel cost $125 rather than $100.
Now, you may be wondering, what on earth could the benefits of tariffs be? To put it simply, the main advantage of applying a tariff is to drive money that consumers might spend on foreign products to products made in the country, which in turn supports the workers of the country as well as the companies based there. In a way, it’s a bit of an incentive for companies to build infrastructure in that country. Basically, the tariff is making what might be cheaper products from overseas less competitive with products/goods that are made in the country.
Some Misconceptions:
A few things that people might believe tariffs do (that aren’t true) are:
· The country that the product/good is coming from pays the tariff – this isn’t true as it is the companies that import the product that pay the tariff, hence passing it onto the consumer.
· Tariffs can reduce trade deficit – this means that tariffs increase the amount of trade coming into the country. This is often not the case as it becomes less beneficial for foreign exporters to import the product into the country.
Overall, there can be benefits to tariffs but only if they are applied correctly and at the right time, otherwise they can result in higher prices and a trade deficit. Historically, tariffs have been used in all sorts of circumstances, but it is still yet to be seen how they will be used in the near future.