All About Tariffs
Container ship filled with shipping containers.
Tariffs have been in the news lately. What are they, and how might you be impacted?
Tariffs in the News
Tariffs seem to be in the news almost daily. The incoming president has identified tariffs as one of the key aspects of his economic plan. I’ve had more than a few clients ask me about tariffs: what are they, how do they work, and most importantly, how might their personal finances be impacted. Here are some answers.
What are tariffs?
Tariffs are a type of tax that is levied by the US government at the border, on specific products or materials that are imported from other countries. Tariffs make imports more expensive. This puts financial pressure on companies that import materials and can result in changes to the company’s business model. Some changes a company could make as a result of tariff levies are:
Increase the price of the end product sold to consumers
Find alternate suppliers of materials that were previously imported, whether that means importing the same materials from another country without tariffs, or finding a domestic supplier of those materials
Accept lower profit margins due to higher cost of goods
Force foreign producers to lower their costs
Go out of business, or change the business model completely to eliminate a need for the import in the first place
Tariffs can be levied in several different ways. They can be levied on specific items regardless of the country it is made in. An example of this would be a $2,000 tariff on every foreign-made car regardless of exactly which country produced the car.
Tariffs can also be levied on all imports from a specific country. For example, a 10% tariff levied on any import from China.
Why are tariffs implemented?
At a more macro economic level, one reason tariffs are implemented is to protect domestic industry or increase the amount of industry and production within our own country. For example, putting a tariff on all imported grain would help the US farmers get a better price for their grain.
Another reason tariffs may be levied is to force a change to the balance of trade between countries. (Balance of trade is essentially the amount of good imported and exported between countries. If your country’s products are cheap, more consumers around the world might buy your products. If your country’s products are more expensive, less consumers around the world can afford to buy your products.)
If a tariff is levied, it will cost more to import from that country, so that country will sell less products or materials. As part of trade negotiations between countries, the tariff might be lifted if that other country buys more US-made products which would make the balance of trade more equal.
Yet another reason tariffs are implemented is political – to force another country to change some action we don’t like. An example of this is tariffs levied against Russian oil due to its aggression into Ukraine.
Who pays tariffs?
The tariff is a tax that is paid at the border by the US-based importer. This in turn means that the US importer increases the price of the goods they sell inside the US, and passes the tariff cost along to consumers, OR the US company has lower profit margins and therefore has less profit to use for hiring more workers or growing their company. But ultimately, the cost of the tariff is typically borne by those inside the US.
In addition, when the US implements tariffs against other countries, those same countries may decide to implement retaliatory tariffs on US-made goods, which can result in fewer American goods sold overseas. This escalation can result in a trade war, which is not usually good for anyone involved.
How might tariffs affect our personal finances?
The past few years have seen higher inflation rates than we’ve seen in many years. This means your income may not go as far as it once did. Tariffs can result in higher prices, driving inflation yet higher still. Some changes that consumers may see as a result of higher prices are increased personal consumer debt; choosing to delay a new purchase and spending more on repairing an old item like an appliance; or being forced to spend less on discretionary purchases since required purchases like groceries, gas and housing take up a larger share of your budget.
It’s also possible that less expensive goods may be harder to find, such as dollar store items typically imported from China. Studies have shown that folks with less income are more impacted by tariffs, because more of their income goes towards required spend and because items they purchase are more likely to be cheaper-made items items from foreign countries (think a $1,200 couch from Wayfair made in China vs a $5,000 Room and Board couch made in North Carolina). That foreign-made couch may suddenly be 20% more expensive, making it even further out of reach.
The problem is how to prepare for tariffs. We don’t yet know how tariffs will actually impact your personal budget. What tariffs will be levied, of all the tariff ideas currently being thrown about? How much of what’s being discussed is actually a negotiating tactic with those other countries, rather than something that will actually occur?
Consider your own situation. What big purchases do you plan to make this year? Buying a new car? You have many choices of auto brand and type. Some vehicles are imported, while others are made in the US and would be less impacted by tariffs. If you have a wide range of purchasing choices, you’ll have a better chance of avoiding paying more due to tariffs.
Back in 2018, then-president Trump levied a 50% tariff on washing machines. Do you remember this, and more importantly did it impact you? This could be an example of a tariff that was all over the news at the time, but didn’t actually impact you unless you needed to buy a washing machine. So it’s possible that tariffs levied in the future may impact you less than the news would have you believe.
One of the best ways to prepare for higher costs is to take a look at your current spend. Can you identify areas of waste or overspending? Almost every budget has some areas to cut or eliminate costs with a bit of mindfulness.
Another way to prepare for higher costs is to earn extra income – while you’ll pay more in income tax, you’ll also have more money to spend on living.
Yet another idea is to keep your ongoing costs low – this could mean not moving to that more expensive home, or reviewing your subscriptions to eliminate what’s not needed, or even turning down the heat in your home at night.
Finally, an idea is to educate yourself. Get knowledgeable about how tariffs work, what is being proposed, and then evaluate how this all impacts you. And, reach out to your financial advisor for a personal conversation.
If you’d like to read more about tariffs, here’s an informative article from Investopedia. And here’s an article by the BBC which provides additional context about how tariffs might impact the US consumer.
