How much do you pay for gasoline? Guacamole? Flowers? Prices on those products and more could go up soon as this weekend if President Donald Trump’s threatened tariffs on China, Canada, Mexico and other countries take effect.
Trump has asserts that tariffs — basically import taxes — will create more factory jobs, shrink the federal deficit, lower food prices and allow the government to subsidize childcare. Mainstream economists are generally skeptical of tariffs, considering them a mostly inefficient way for governments to raise money and promote prosperity.
But what exactly is a tariff, how do they work, what could get more expensive and how could you be impacted?
Here’s a breakdown.
What are tariffs?
Tariffs are a tax on imports.
In the U.S., tariffs aim to discourage companies importing goods from places like China by making them pay more for the items they are trying ship in.
They are typically charged as a percentage of the price a buyer pays a foreign seller. In the United States, tariffs are collected by Customs and Border Protection agents at 328 ports of entry across the country.
U.S. tariff rates range from passenger cars (2.5%) to golf shoes (6%). Tariffs can be lower for countries with which the United States has trade agreements. For example, most goods can move among the United States, Mexico and Canada tariff-free because of Trump’s US-Mexico-Canada trade agreement.
Thursday, Trump confirmed that he’s “in the process” of implementing the trade sanctions on China and left the door open to including oil in those tariffs. Goods from China could be subjected to a 10% tariff, while those from Mexico and Canada could come under tariffs of 25%.
Who pays tariffs?
Trump insists that tariffs are paid for by foreign countries. But in fact, it is importers — American companies — that pay tariffs, and the money goes to U.S. Treasury. Those companies, in turn, typically pass their higher costs on to their customers in the form of higher prices.
That’s why economists say consumers usually end up footing the bill for tariffs.
Still, tariffs can hurt foreign countries by making their products pricier and harder to sell abroad. Yang Zhou, an economist at Shanghai’s Fudan University, concluded in a study that Trump’s tariffs on Chinese goods inflicted more than three times as much damage to the Chinese economy as they did to the U.S. economy.
How do tariffs work?
According to the Tax Foundation, while tariffs “do place an economic burden on foreign exporters, the costs are often borne by consumers in the country that is imposing them.”
“Tariffs directly increase the cost of domestic sales by artificially increasing the price on imports,” the organization stated.
Experts agree.
“Ultimately, the cost of tariffs will be paid by us, the consumer,” George Ball, chairman of investment management firm Sanders Morris, told CNBC. “They’ll be buying things at higher prices than they otherwise would.”
The true impact or rise of costs remains to be seen, however.
Clark Bellin, chief investment officer at Bellwether Wealth, said the relationship isn’t as simple as some Democrats have suggested, “especially when you throw the inflation we’ve been having into the mix.”
The Peterson Institute for International Economics estimates the yearly cost of a 20% universal tariff, paired with a 60% tariff on China, would cost a typical U.S. household $2,600 per year.
Meanwhile, The Tax Foundation estimates a 10% universal tariff would increase taxes on U.S. households by an average of $1,253 in 2025, and a 20% tariff would increases costs by $2,045.
A report from the National Retail Federation estimated up to $7,600 in additional costs per U.S. household annually if Trump’s tariffs are imposed.
“While impacts as a share of the U.S. economy may seem small, it is a different story for individual products, including
many consumer goods whose prices already are inflated by extra tariffs on Chinese imports,” the report stated.
Trump has argued, however, that tariffs will prompt other countries to negotiate better trade deals and motivate them to lower their own tariffs on U.S. imports.
What products could be impacted by tariffs?
“Unfortunately, it’s going to impact a lot of consumers,’’ said Dave Evans, co-founder and CEO of Fictiv, a San Francisco company that helps clients manage their supply chains in plastics and metals. “We saw this in his first term. A tariff isn’t fully absorbed by the companies.’’
According to the Peterson Institute for International Economics, American consumers and households are predicted to bear the effects of higher tariffs, with “substantial costs for the average American household and a burden that falls more heavily on lower income households.”
From China, sneakers furniture and toys could become more expensive, CNBC reported.
“Around 80% of toys imported to the U.S. come from China, and the cost of toys made outside of the U.S. could increase by up to 56% under Trump’s proposals, according to The Toy Association, a trade group that lobbies on behalf of the industry,” CNBC said.
That would make a $20 Barbie doll — which has historically been manufactured in China — cost as much as $31.20, according to CNBC.
Between 30% and 40% of furniture is produced in the U.S., but as much as 50% of raw materials – like wood, fabrics, hinges and screws – are imported, making price increases on home products difficult to avoid, even if they’re technically “made in America,” CNBC said.
From Mexico, prices for cars, beer and avocados could rise. Tariffs on Canadian goods could also impact automakers and car buyers, along with French fries and winter coats.
Have tariffs been used before?
By raising the price of imports, tariffs can protect home-grown manufacturers. They may also serve to punish foreign countries for committing unfair trade practices, like subsidizing their exporters or dumping products at unfairly low prices.
Before the federal income tax was established in 1913, tariffs were a major revenue driver for the government. From 1790 to 1860, tariffs accounted for 90% of federal revenue, according to Douglas Irwin, a Dartmouth College economist who has studied the history of trade policy.
Tariffs fell out of favor as global trade grew after World War II. The government needed vastly bigger revenue streams to finance its operations.
In the fiscal year that ended Sept. 30, the government collected around $80 billion in tariffs and fees. That’s a trifle next to the $2.5 trillion that comes from individual income taxes and the $1.7 trillion from Social Security and Medicare taxes.
Still, Trump wants to enact a budget policy that resembles what was in place in the 19th century.
Tariffs can also be used to pressure other countries on issues that may or may not be related to trade. In 2019, for example, Trump used the threat of tariffs as leverage to persuade Mexico to crack down on waves of Central American migrants crossing Mexican territory on their way to the United States.
Trump even sees tariffs as a way to prevent wars.
“I can do it with a phone call,’’ he said at an August rally in North Carolina.
If another country tries to start a war, he said he’d issue a threat:
“We’re going to charge you 100% tariffs. And all of a sudden, the president or prime minister or dictator or whoever the hell is running the country says to me, ‘Sir, we won’t go to war.’ ”
Could tariffs backfire?
Tariffs raise costs for companies and consumers that rely on imports. They’re also likely to provoke retaliation.
The European Union, for example, punched back against Trump’s tariffs on steel and aluminum by taxing U.S. products, from bourbon to Harley-Davidson motorcycles. Likewise, China responded to Trump’s trade war by slapping tariffs on American goods, including soybeans and pork in a calculated drive to hurt his supporters in farm country.
A study by economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard and the World Bank concluded that Trump’s tariffs failed to restore jobs to the American heartland. The tariffs “neither raised nor lowered U.S. employment’’ where they were supposed to protect jobs, the study found.
Despite Trump’s 2018 taxes on imported steel, for example, the number of jobs at U.S. steel plants barely budged: They remained right around 140,000. By comparison, Walmart alone employs 1.6 million people in the United States.
Worse, the retaliatory taxes imposed by China and other nations on U.S. goods had “negative employment impacts,’’ especially for farmers, the study found. These retaliatory tariffs were only partly offset by billions in government aid that Trump doled out to farmers. The Trump tariffs also damaged companies that relied on targeted imports.
If Trump’s trade war fizzled as policy, though, it succeeded as politics. The study found that support for Trump and Republican congressional candidates rose in areas most exposed to the import tariffs — the industrial Midwest and manufacturing-heavy Southern states like North Carolina and Tennessee.
Could tariffs increase inflation?
On Monday, the economics division of the insurance company Nationwide estimated that Trump’s proposed tariffs on Canada and Mexico would increase inflation by as much as 0.5 percentage points and pull down growth by 0.7 percentage points.
The analysis noted it did not “account for potential retaliatory tariffs from Canada or Mexico, which could amplify the deleterious impact on inflation and GDP growth.”
Trump has made lower gasoline prices one of his key strategies for tackling inflation, but tariffs on Canada could drive up prices at the pump unless Trump creates carveouts in his plan.
“For example, 60% of oil and gas imports come from Canada,” said Oxford Economics’ Martin. “A 25% tariff would lead to higher gasoline, diesel, and petroleum product prices for households and firms, especially in the Midwest and Rocky Mountain regions, where refineries are connected to Canada by pipeline.”
The tax services firm PwC looked at the possible impact of 25% tariffs and found that companies importing from Canada could have to pay $106 billion more annually in import taxes and those importing from Mexico could owe $131 billion more.
“When we think about hardest-hit industries, we think about transportation and automotive,” said Chris Desmond, a principal at PwC’s international trade practice. “The amount of companies that have operations in Mexico and Canada in that industry with components and parts as well, including even airplanes, that’s going to be a huge hit.”
Desmond estimates that taxes paid on imports in the transportation sector from all of Trump’s tariff plans, which include new taxes on China and other countries, could increase from $4 billion a year to $68 billion. It’s unclear how companies would absorb those costs or possibly pass them along to consumers.
None of those analyses is at the forefront of Trump’s public thoughts. His argument is that tariffs would make the U.S. wealthy by sheltering it from competition and safer because they could be tools to force other countries to reduce illegal immigration.
“Tariffs, I told you, most beautiful word in the dictionary,” Trump said Monday as he recalled his campaign speeches praising the import taxes. He reminisced in that speech how he was criticized for praising the term, prompting him to conclude that tariff is, in fact, the fourth most beautiful word after “God, love, religion.”
from NBC Chicago https://ift.tt/aJi71f9
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