Recent news stories have been dominated by talk about tariffs and trade wars and there’s no doubt that the economics are complex. This issue hits close to home for us – tariffs have a direct effect on All American Clothing and many of the people and businesses we work with.
Debating the pros and cons of the new tariffs levied on steel and aluminum imports, as well as potentially Chinese technology products, isn’t the goal of this blog. Putting politics aside, here’s what the average American needs to know about tariffs and how it could affect them:
What are tariffs? A tariff is a tax on goods imported into a country. This tax is a percentage of the total cost of the product (includes insurance, freight, etc.). A tariff raises the price of the imported goods.
Which countries charge tariffs? All countries levy tariffs, but on different goods and products depending on which domestic industries a country wants to protect from global competition.
Tariffs are waived when countries form free trade agreements with each other. Businesses use trade agreements as market strategies – they target exports to countries their own country has favorable trade agreements with to minimize cost.
What are the pros of tariffs? When tariffs are applied to a foreign product, the result is the product becomes more expensive and gives a leg up to domestic makers because they don’t have to pay the tax. The theory is this will protect and support domestic industries in an effort to increase the demand for their products, which drives their business and creates new jobs.
In some cases, this is a strategy governments use to revitalize industries that are struggling. In others, it’s a strategy to protect a country’s most valuable industries.
What are the cons of tariffs? Opponents say tariffs often result in “tit for tat” trade wars. When a country is hit with a tariff, it may hit back with tariffs of its own. The cost of tariffed products goes up and companies either have to absorb that increased cost or pass it on to consumers. The fear is that this will distort trade and create products that are too expensive for consumers, decreasing demand and causing job loss on both sides.
Another concern revolves around whether domestic industries can meet the increases in demand if the tariffs accomplish their goal and funnel business to domestic makers.
What does this mean for American consumers? The average American will likely see both increases and decreases in the cost of products – it simply depends on which products they are buying. It’s unknown and debatable whether the increased costs will be minimal or significant.
For example, the recent steel and aluminum tariffs could raise the prices of everything from automobiles to canned goods because U.S. makers depend on imported steel and aluminum. But the increased demand for domestic steel and aluminum could create more job opportunities and higher wages for workers in those industries in the U.S.
What does this mean for American manufacturers? U.S. manufacturers must evaluate how tariffs will impact their supply chains and materials sourcing. For bigger manufacturers with global supply chains who depend on competitive pricing to manufacture their goods, tariffs will increase costs. For domestic producers of tariffed products, like the American steel industry, the recent tariffs are nothing but positive news as they signal an increase in demand.
Arguments for and against tariffs abound, and the forces of supply and demand are shifting in the U.S. and abroad. What do you think about the new proposed tariffs and the effects it will have?