What are tariffs?
Tariffs are taxes imposed by a government on imported goods at the border. They serve multiple purposes, including generating revenue for the government, protecting domestic industries from foreign competition, and exerting political leverage in international trade relations.
By increasing the cost of imported goods, tariffs make domestic products more competitive, thereby encouraging consumers to purchase locally produced items instead of foreign imports. However, the latter consequence is that tariffs may also raise prices for consumers and could provoke retaliation by other countries, thereby developing into trade wars.
Types of tariffs
The different types of tariffs include:
- Ad Valorem tariffs: These are a fixed percentage of the value of the imported good.
- Specific tariffs: A fixed amount on the number or volume of goods imported.
- Compound tariffs: Combine elements of both ad valorem and specific tariffs.
Tariffs can have a great impact on the workings of the market through a change in supply and demand. With the imposition of tariffs, the prices of imports increase and, subsequently, the consumer prices increase, thereby reducing consumption of those goods. This will benefit the domestic producers; however, this can lead to ineptness in the market as competition becomes less.
Trump’s proposed tariffs
President-elect Donald Trump has proposed to increase tariffs manifold, especially for imports from China. His plan includes:
- Tariffs on Chinese goods ranging from 60% to 100%, a far-out proportional response he says will balance the unfair trade practices of the Chinese.
- Tariffs on all other imports ranging from 10% to 20%, a more global approach that would cover a wide swath of products and trading partners.
The imposed tariffs are more likely to result in steep price rises for American consumers. It is estimated that such tariffs would cost an average U.S. household around $2,600 yearly because of higher prices on basic items. Among the items that might get marked by some of the most substantial price hikes are electronic gadgets, which rely heavily on imports from China, including smart-phones, laptops, and video game consoles.
Impacted products
Trump’s proposed tariffs could most likely hit the following products:
- Electronics: Laptops, tablets, smartphones, and other consumer electronics could see price hikes of 26% to 46%.
- Clothing: Since more than 80% of items sold in the U.S. are imported, such basic things as jeans and T-shirts will surely rise in price.
- Toys and games: Most toys are produced overseas, so their prices will significantly increase under new tariff legislation.
Potential effects on the U.S. economy
These tariffs will have very deep effects on the economy of the United States of America. Although meant to protect industries and jobs in their country, the negative side of the effects include:
- Increased consumer prices: In most cases, the costs of tariffs flow to consumers. Everyday goods will become unaffordable to many households. The burden will disproportionately shift to the low-income families.
- Reduced economic growth: Historical evidence suggests that the earlier tariff actions by Trump led to flat real income growth for American labor and stifled GDP growth. Economists suggest that new tariff measures are likely to have similar consequences.
- Trade wars: The high tariff can also lead to retaliatory action against the affected countries, which can create a vicious circle of high and increasing trade barriers with adverse effects on the economies of the two trading partners. Such disputes disrupt supply chains for U.S. exporters globally.
- Market inefficiencies: Shielding industries with tariffs can often lead to inefficiencies in those markets. Absence of competitive pressure from foreign producers would take away all motivation from the domestic companies to innovate or improve their products.
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