A tariff is a tax placed on goods imported from other countries. Governments use tariffs to make foreign products more expensive, which gives domestic companies a better chance to compete. While at first glance tariffs sound like they can help protect the economy, the full picture is more complicated – and more relevant to your wallet than you might expect.
Who actually pays tariffs?
Tariffs don’t make foreign countries pay, instead they shift who pays and how. Typically tariffs move costs from domestic producers to consumers and importers.
- An importer pays the tariff at the border.
- That importer raises prices to cover the cost.
- Businesses and consumers end of absorbing most of the cost of the tariff.
Do tariffs cause inflation?
Tariffs can contribute to inflation by increasing the cost of imported and domestic goods. Typically, tariffs can result in higher prices on everyday products, like electronics, vehicles and parts, building materials, and household goods. Even domestically produced goods often become more expensive because competition is reduced.
When prices rise but wages don’t keep up, your money simply doesn’t go as far. This is one of the biggest indirect effects of tariffs that can be overlooked.
Why do governments use tariffs?
At their core, tariffs are meant to do three things:
- Protect domestic industries by making imported goods more expensive, giving local companies the ability to compete.
- Raise government revenue, as the government collects the funds.
- Gain leverage in negotiations to push for things like policy changes from trading partners, reduced trade deficits, and supply chain reshoring.
How do tariffs impact other countries?
Tariffs rarely go unanswered, with other countries often responding to tariffs with tariffs of their own, with exports becoming more expensive abroad and ultimately slowing down global trade.