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The goal of tariffs, according to politicians who favor them, is to protect American industries by making foreign goods more expensive. The idea is simple: if foreign products cost more, consumers will turn to domestic options, supporting American businesses and, presumably, American jobs. What these politicians seldom mention is that the added costs are not paid by the foreign companies, they are ultimately paid by American consumers.
Here’s how it works.
Tariffs are taxes levied by the US government on imported goods. When importers bring in a product from overseas, they—not the foreign company—pay the tariff. The importers pass that cost along to retailers, who in turn pass it on to you.
For example, if an imported product priced at $100 is hit with a 20% tariff, the importer pays an extra $20 to the US Treasury and adds that cost to bring the product price to $120. The retailer then buys the product from the importer at the new higher price and adds $20 to the price tag for their customers. A 20% tariff on the import price does not necessarily mean a 20% higher price for consumers. If the previous retail price for that product was $200, the consumer will now pay $220, a 10% increase.
The US government benefits by collecting more tax revenue in the short term. However, many economists would argue that the higher prices of imported goods will lower sales and have a long-term negative impact on the broader economy, which indirectly will result in less tax collected by the government. While foreign companies don’t pay tariffs directly, they may also lose income if tariffs make the imported products too expensive and American consumers turn to domestic products.
However, an unintended consequence is that when tariffs reduce competition, American companies often raise their prices. When tariffs were imposed on imported washing machines, US manufacturers raised their prices by 12% because they knew consumers had fewer options.
I was initially surprised when former president Donald Trump started imposing higher tariffs in 2016. My worldview was that Republicans opposed tariffs and were the party of free trade.
When I did some research, I learned that Republicans were actually the original champions of tariffs. For much of the late 19th and early 20th centuries, they supported high tariffs to protect American industries. These tariffs are often blamed for worsening the Great Depression.
As a capitalist with a belief in free markets, I was shocked to find that Republicans once supported protectionism. I was also surprised to learn that Democrats used to be the free trade party, especially when they represented Southern agricultural interests that relied on exporting crops.
As the Republican presidential candidate, Trump has recently proposed widespread tariffs, including 20% on all imports and 60% on all goods imported from China. This stance is not the GOP breaking from its roots but going back to a time when protectionism and higher taxes were central to Republican policy. Unfortunately, we don’t see many signs that the Democratic party, which under the current administration kept some tariffs in place, is returning to its roots of free trade. Regardless of the election outcome, tariffs may still affect the prices of some consumer goods.
If you are looking for a new TV or picking up a pair of jeans, chances are you don’t give even a passing thought to tariffs. Yet the prices you pay for either product are likely to have been nudged upward by these invisible taxes.
Higher tariffs may sound like a win for American jobs and a penalty for foreign producers. But American consumers are primarily the ones who foot the bill.
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