During the campaign, President Trump promised to renegotiate trade deals, and during 2018, he’s made good on some of those promises by imposing tariffs on multiple items, but what are tariffs and how will they affect the economy and consumers? To begin, it’s helpful to understand what tariffs really are.
Tariffs are a form of excise tax imposed by the federal government. Tariffs are added to the price of an imported good, and the tariff or tax collected goes to the federal government. They are often controversial.
In fact, tariffs even contributed to the beginning of the civil war. In 1828, the federal government implemented a 38% tax on 92% of all imported goods. The tariff was designed to help manufacturers that were losing money due to the cheaper products being imported from Britain. The problem with this plan was that factories in America were mostly located in the north, whereas southern states were predominantly agricultural.
The help for the northern manufacturers came at a huge cost to southern states that relied on British purchases of their agricultural exports. In addition, the south had to pay much higher prices for goods that it didn’t produce, either paying the tariff on imported goods or paying additional shipping costs to get goods from northern manufacturers. These hardships for southern consumers led to the tariff of 1828 being called the “Tariff of Abomination.” Eventually, President Andrew Jackson signed into law the Tariff of 1832 which made some reductions to the tariffs, but for the south, it was too little, too late.
The past repeats itself
Just as tariffs increased the cost of goods for Americans in the 1800s, they will also increase costs for Americans today. The tariff on steel and aluminum imports will help the American steel industry. With the tariffs in place, US Manufacturers will be able to charge higher prices in the market, while remaining competitive. What’s more, they’ll see higher profits that will allow them to hire more workers, increase pay rates, and improve the economic outlook for the areas where those manufacturers are located.
What happens in these situations, is that the country or countries who have exports subject to tariffs often levy tariffs in retaliation. That’s what China is threatening to do at the moment. What’s more, the Chinese government has announced plans to raise tariffs on soybeans, and other commodities that just like in the 1800s will hit agricultural producers the hardest. President Trump has made clear that the current situation might indeed hurt agricultural producers, but also said that he has other plans to help farmers. It’s not clear exactly what those other plans are.
For the average consumer, purchasing raw steel isn’t probably an issue, but that doesn’t mean that the increasing steel prices won’t affect consumers at the register. When tariffs are raised for raw materials such as steel, it affects a large swath of the market. Automobiles, canned goods, even things like flatware will see an increase in production cost. An increase that manufacturers will surely pass along to consumers.
Consumers hit the hardest
What does this all mean? It means that the average American consumer will be bearing the cost of the tariff. That’s great for steel manufacturers, and at the same time not so great for agricultural producers who will not only see losses in their profits but will also have to pay a higher price for goods they need.
The bottom line is tariffs, just like other economic policy, are both good and bad. There will be winners and losers. Even if the tariffs do help American producers, in the short run, consumers will be hit by the increased prices long before any benefit from increased production of steel and aluminum is seen.