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360° Perspective: How Tariffs Work

Posted: 10:25 PM, Jun 06, 2019
Updated: 2019-06-07 14:27:30-04

COLORADO SPRINGS – In this 360° Perspective we’re breaking down what tariffs mean for the economy, your pocketbook, and how they work.

Tariffs had sort of been fading into history but President Trump is now embracing them as a tool.

If a government thinks trade with another country is becoming unbalanced it might tax certain items from that country.

For example , the U.S. imports more goods from China than any other country in the world, to the tune of $505 billion in 2017. That same year the U.S. only exported $130 billion worth of goods to China. That creates a big gap, aka the trade deficit, of $375 billion.

Here’s how tariffs work- consider them a tax on imports. They’re sometimes called duties or levies.

For a very small-scale simple example, putting aside the massive real-world amounts that are subject to tariffs, let’s say an American retailer buys 100 umbrellas from China. They’re $5 each for a total of $500. The U.S. tariff rate for the umbrellas is 6.5 percent. So the retailer would pay $32.50 on the shipment, raising the price to $532.50. That amount would likely get passed on to the consumer in the U.S.

Tariffs are collected by Customs and Border Protection Agents at 328 ports of entry across the U.S. The proceeds go to the treasury. The rates are published in the Harmonized Tariff Schedule , which lists the tariffs on everything from dried plantains (1.4 percent) to parachutes (3 percent).

Tariffs aim to achieve two things.

First, increase government revenue. They were once a big money maker for Washington. According to Douglas Irwin at Dartmouth , from 1790 to 1860, tariffs produced 90 percent of federal revenue. That changed when the federal income tax was established in 1913.

Second, they aim to protect domestic industries from foreign competition. They discourage imports by making them costlier. They also reduce pressure from foreign competition and make it easier for homegrown companies to raise prices.

Here’s why they haven’t been as big in recent history. As global trade grew after World War II they fell out of favor. The World Trade Organization was formed and deals like the North American Free Trade Agreement were made which reduced or eliminated tariffs.

According to the most recent data from the World Bank and the Pew Research Center , which is from 2016, the average U.S. tariff was 1.6 percent. That’s among the lowest in the world. Globally, Chinas average was at 3.5 percent, Brazil at 8 percent and Canada on the lower end at 0.8 percent.

Some economists believe tariffs are a bad idea. They raise the cost of imports for people and companies who need them. By reducing the competitive pressure they give U.S. producers leeway to raise prices, good for them, but bad for consumers.

An example, U.S. companies that buy steel, say U.S. tariffs on imported steel leave them at a competitive disadvantage. They have to raise prices on consumers while producers in other countries can buy it for less, and offer lower-priced goods to the same consumers. Bad for them, but could be good for consumers.

Other economists believe tariffs make marketplace competition fair, helping home economies grow, while nations compete with each other to sell resources. That has a trickle-down effect to us in the form of more affordable goods.

So what will it cost us? With the recent tariff hikes here’s what it’s expected to cost the average U.S. family this year according to Liberty Street Economics.

China duties will cost about $830. If you add 5 percent from Mexico that adds another $130 or so. It averages to about a thousand dollars a household.

Evan Horowitz at FCLT Global says this is not a trade war, that this costs about the size of the average tax benefit that households got from the 2018 republican tax cuts, which some polls suggested they didn’t even notice.

Still, you may see some prices go up on big-ticket items that you need or want to buy.

Financial expert Chris Hogan said there are four things you can do in that case.
1. Pay the higher cost.
2. Purchase the item from a company that’s not affected by the tariff.
3. Buy a used item.
4. Wait to buy your item until the tariffs lessen again (and Hogan says they usually do.)

If you have an idea for a future 360° Perspective email 360@koaa.com.