I just wanted to put out there what tariffs are and who really pays them since they are hitting the news stream big time today.
Tariffs are a form of tax placed on specific imported goods by the receiving country. They are usually implemented by a country to collect revenue and also to make their domestic products more price competitive. Tariffs are a way for a country to level the playing field for their companies but also are a big part of a country’s strategy practicing protectionist economics.
Unfortunately, tariffs are not the best idea when drawing up trade agreements. It puts countries in an adversarial relationship instead of one that is mutually beneficial. Hence, the big standoff in our trade negotiations with China, Europe, Canada, etc.
That’s my take on tariffs. So, who actually foots the bill? It’s definitely not the country that is exporting the tariffed goods. It’s the companies that import the tariffed goods. For example, a company that imports steel to use in their manufacturing plant has to pay a steel tariff. That company has many options to manage the increased costs of their product:
- It can eat the tariff costs and live with a smaller profit.
- Ask the supplier for a discount to offset the tariffs.
- Reduce their costs in other areas to make up for the increased costs due to the tariffs.
- Pass the tariff costs on to their customers by raising prices.
I’m sure most companies that import use a combination of all of the above. But, it seems like most companies are definitely passing the increased costs onto the consumer.
Tariffs, in my opinion, are an antiquated and hostile strategy to use when negotiating trade deals in a global economy. They almost always force a binary outcome (only 1 can win) and end up hurting the consumers the worst.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
