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Key Points:
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Tariffs protect domestic industries by reducing foreign competition, but they can also raise prices for consumers and businesses.
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Small businesses relying on imported materials may struggle with higher costs from tariffs, potentially leading to increased product prices.
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Ultimately, consumers pay for tariffs, as businesses often pass the added costs down the line, increasing the economic burden on buyers.
A tariff, specifically an import tariff, is a tax imposed on imported goods. Tariffs have been thrust into the limelight again this election year. But what effect do trade tariffs have on businesses, particularly small businesses?
With former President Donald Trump touting the "great" things his administration achieved with tariffs during his presidency — and after proposing on the Joe Rogan podcast even higher tariffs and eliminating income tax — it’s more important than ever to understand both the positive and negative impacts tariffs can have on the economy.
Whether you’re a business owner or just curious about how these policies affect your daily life, let’s break down why tariffs are good, why tariffs are bad, and who ultimately pays for them.
One of the biggest misconceptions about tariffs is who actually pays for them...
Understanding Tariffs
Tariffs are taxes imposed on imported goods by a country’s customs authorities. These taxes can be levied on goods as they arrive at a nation’s borders, making imported items more expensive and less competitive than locally produced products. While tariffs can also apply to exported goods, this is a rare occurrence. Countries and trading partners often sign free trade agreements to reduce or eliminate tariffs, promoting smoother and more cost-effective international trade.
In recent years, the U.S. administration has shifted away from several existing and proposed trade agreements, bringing tariffs back into the spotlight. This shift has significant implications for businesses of all sizes. While some business owners can mitigate the impact of tariffs with appropriate planning, in some industries small businesses may bear the brunt of these additional costs. Understanding how tariffs work and their potential effects is crucial for navigating today’s complex trade environment.
Why Do Countries Impose Tariffs?
Countries impose tariffs for several key reasons, with the primary goal being to protect domestic producers and industries. By making imported goods more expensive, tariffs help businesses manufacturing their product locally compete more effectively. This is particularly effective in sectors vital to national security. For instance, tariffs on steel and aluminum imports aim to ensure that these critical materials are produced domestically, safeguarding the nation’s defense capabilities.
Another reason for imposing tariffs is to incentivize foreign countries to change their trade practices. Both the Trump and Biden administrations have used tariffs as a tool to address what they perceive as unfair trade practices by other nations. Additionally, tariffs can serve as a source of revenue. Despite the tariffs imposed during the Trump and Biden administrations, tariff revenues in fiscal year 2023 were slightly more than $80 billion, a small fraction of the $4.439 trillion in total U.S. government revenues for that year.
Historically, the global proliferation of free trade agreements since World War II has substantially lowered tariff rates, reducing tariff revenue in wealthy countries. However, many developing countries still rely on tariffs for a significant portion of their government revenues. Understanding the multifaceted reasons behind tariffs helps clarify their role in international economics.
Pros and Cons of Tariffs
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Why Are Tariffs Good to Protect Domestic Industries?
Tariffs are often seen as a way to promote domestic industry production. Tariffs raise prices on imported goods, making local products more competitive. When the price of imported goods increases due to tariffs, local businesses that produce similar products benefit because they can compete on a more even playing field.
For instance, tariffs can boost U.S.-based manufacturers who might otherwise struggle to compete with cheaper foreign goods. This is why some small businesses actually see a boost when tariffs are introduced — they face less competition from foreign companies and may see an increase in demand for their products.
During Trump’s previous term, tariffs imposed on Chinese goods were intended to protect U.S. manufacturers. Additionally, tariffs can help build domestic industries that are crucial to national security, such as steel and manufacturing, by ensuring that production stays within the country.
When tariffs are in place, businesses in strategic industries like technology or defense can have more stability.
Why Are Retaliatory Tariffs Bad for Businesses?
On the flip side, when governments impose retaliatory tariffs, there can be some serious downsides, especially for businesses that rely heavily on imports. Small businesses with thin profit margins may struggle to absorb the increased costs associated with tariffs, forcing them to raise prices or find other cost-cutting measures. Tariffs often raise consumer prices as businesses pass those extra costs along through higher product prices.
Moreover, tariffs can lead to retaliatory actions from other countries, resulting in a trade war. This can further hurt businesses that rely on exporting their products abroad. Trump’s trade war with China, for example, led to China slapping tariffs on American goods like soybeans, making U.S. products more expensive overseas and reducing demand. Small businesses that rely on global supply chains may find themselves squeezed as they face both higher costs for imported materials and decreased demand for exported products.
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Who Pays for Imposed Tariffs?
One of the biggest misconceptions about tariffs is who actually pays for them. For instance, tariffs on Chinese goods have significantly increased costs for American businesses and consumers. While some believe that tariffs punish foreign exporters, the reality is that the financial burden falls primarily on the importers in the U.S. This means that American companies importing goods from overseas — whether it’s raw materials, electronics, or clothing — are the ones paying the tariff fees. They then pass those costs on to the consumer, raising prices on everyday goods.
According to a study mentioned by Axios, Trump’s tariffs cost U.S. consumers and businesses an additional $3 billion per month in 2018 due to higher prices. The same study found that domestic manufacturers, with less competition, increased their own prices to maximize profits. Ultimately, while tariffs are designed to help domestic businesses, they can result in higher consumer costs.
Real-World Examples of Tariffs
The Trump administration’s decision to impose tariffs on solar panels and washing machines in 2018 is a notable example of how tariffs can impact the economy. These tariffs were met with retaliatory tariffs from other countries, leading to a complex web of economic consequences. Some argue the tariffs had a negative impact on the U.S. economy by reducing the overall GDP growth of American workers.
Another significant example is the US-China trade war, which began in 2018. This conflict resulted in the imposition of tariffs on billions of dollars worth of goods, affecting a wide range of industries. The trade war has had a profound impact on businesses and consumers, leading to increased costs and reduced access to certain goods. Many companies have had to navigate higher prices for imported materials while facing decreased demand for their exported products.
The Biden administration has maintained most of the tariffs imposed by the Trump administration and has even increased tariffs on certain goods, including steel and aluminum. These actions underscore the ongoing strategic use of tariffs in international trade policy. By examining these real-world examples, we can better understand the far-reaching effects of tariffs on the global economy.
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Should You Act Now Before a Trade War?
Given the uncertainty surrounding tariffs, it’s worth considering how they might impact your future purchasing decisions. If tariffs increase, prices for cars, electronics, and even basic goods could rise by this time next year. This could be a good time to evaluate your financial situation and make larger purchases before prices increase. For general consumers, auto loans may be worth looking into now while interest rates are still relatively low.
For business owners, consider whether it makes sense to finance any equipment purchases before prices surge. Equipment financing can help lock in lower prices today, allowing you to maintain your business operations without absorbing the extra costs tariffs might bring in the future.
Lastly, for those looking to preserve their wealth in the face of potential inflation or rising prices, exploring alternative investments like precious metals — such as gold and silver — could be a wise move. Gold and silver have long been considered safe havens during times of economic uncertainty, and with tariffs potentially driving prices higher, now might be the perfect time to diversify your savings.
Conclusion
Tariffs are a double-edged sword. They can protect domestic businesses and create jobs, but they also have the potential to raise costs for consumers and businesses alike. With election year rhetoric heating up, tariffs are back in the spotlight, and their impact on small businesses could be significant. By understanding the pros and cons of tariffs and the fact that both Democrats and Republicans support some tariffs, you can make informed financial decisions that help you navigate the shifting landscape.
Frequently Asked Questions
What effect do trade tariffs have on businesses?
Trade tariffs can protect domestic businesses by making imported goods more expensive, but they can also increase costs for businesses that rely on imported materials, leading to higher prices for consumers.
Why are tariffs bad for small businesses?
Tariffs increase the cost of imported goods, which can squeeze small businesses with thin margins, forcing them to either absorb the costs or raise prices, potentially leading to lost sales.
Are tariffs good for the economy?
Tariffs can be both beneficial and harmful to the economy. They protect domestic industries by making imported goods more expensive, which can lead to job creation and increased local production. However, they can also result in higher prices for consumers, reduced product variety, and potential trade wars, which may slow down economic growth and create instability. Ultimately, the effectiveness of tariffs depends on how they are implemented and the broader economic context.
Who pays for tariffs?
The financial burden of tariffs is usually borne by the U.S. importers, who then pass the increased costs to consumers through higher prices, meaning consumers pay in the end.
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Will is an expatriate from Arizona, USA, who studied Political Science at Arizona State University. As a passionate personal finance enthusiast, he combines his expertise with a keen interest in current events to create engaging and insightful financial content. Outside of his professional pursuits, Will enjoys the nostalgia of old-school video games, adding a unique touch to his multifaceted profile.
