In this first of a two-part primer on tariffs, today’s column outlines their basic function and history. Thursday, a look at five common types of tariffs.
What are tariffs, and who pays them? A tariff (also called a “customs duty”) is a tax which someone in Country A pays on goods they sell or bring in to Country B. Usually it’s a percentage of the value. So if the U.S. imposes a tariff, we tax the “imports” (stuff brought in) from another country when they arrive here. When another country imposes a tariff, Americans “exporting” (stuff going out) goods must pay those taxes when the exports enter the other country.
Governments do not pay tariffs; companies, manufacturers, or individuals do.
Who gets the money? The government of the country in control of the dock or airport where the goods arrive collect tariffs. Generally, private companies/sellers pay; governments get the revenue.
When, and why, did they start? Starting with the nation’s birth, tariffs were the federal government’s main source of revenue until the income tax of the early 20th century (not counting the Civil War). This revenue was used to build up the nation’s early infrastructure and industries, discouraging competition from Britain and other countries while they gained strength to compete.
What’s a trade war? In short, mutual tariff increases. As the marketplace expanded in the last century, as American companies wanted to both sell and buy things beyond our borders (many goods manufactured here use foreign-made parts; consumers want cheap goods; imported products and foods have become popular), nations entered trade agreements to limit how high those tariffs would go on both sides and define exceptions.
When those agreements fall apart, or in the absence of them, when one side increases a tariff, the other side tends to do the same in retaliation. Tariffs are also a tool of diplomacy; they tend to both impact and reflect how nations are getting along.
Will consumer prices rise, or not? It depends. Most economists agree that generally, tariff increases are passed on to the consumer. However, in some industries this is impractical. Some businesses simply fail in the face of higher costs. Sometimes consumer demand shifts to different products. Higher prices may also drive invention and efficiencies, which may lower other costs to balance things out.
Are tariffs good or bad? Both, or neither. Diplomatic issues aside, on one hand are free market philosophies and unfettered access to goods, which argue against their use. On the other hand, encouraging strong domestic industries, key resource development, and independence are practical and instinctual arguments. There’s no easy answer.
Next time, a look at different types of tariffs.
Sholeh Patrick, J.D. is a columnist for the Hagadone News Network and former managing editor of an international trade law journal.