The topic of tariffs may appear in the news a great deal these days, but these types of taxes are nothing new. Congress passed many tariffs into law over the past several decades. Foreign countries and their governments also levy these duties against the United States and other nations. Today, the United States shifted its policy to collect a wide range of tariffs against various countries. Some of these countries are long-time allies. What motivated the tariffs? Essentially, concerns over trade imbalances pushed the decision. Economists generally don’t support these duties. So, questions arise about the impact of tariffs on the U.S. economy. Will the effect be a positive or negative one?
The first step to understanding the impact of tariffs involves defining them. As noted, tariffs are taxes on imports. The fees can also be punitive. Often, the purpose of a tariff involves an attempt at changing another country’s behavior. If a nation known for unfair trade practices chooses to import a product into the United States, a tariff could attempt to sway the country into changing those practices. Many countries around the world impose tariffs as a protectionist measure. That is, they use tariff fees to dissuade imports to protect domestic products. Such a plan can be fraught with risk though.
Consumer Concerns Over Tariffs
Tariffs create a ripple effect throughout the economy. The impact isn’t always positive. While the goal may be to change behavior or open foreign markets, problems arise when the costs of goods and services increase. Essentially, businesses transfer the cost of tariffs to the consumer.
If the cost of goods increases due to the imposition of tariffs, people must spend more money to purchase something at its new price. Of course, consumers retain the option of not purchasing a product at all. Think of the effect this can have on the automobile industry. The increased price of a particular model of a car could lead consumers to abandon the manufacturer.
The consumer isn’t alone regarding the adverse cost effects. Price increases derive from a manufacturer paying more for parts or other necessary items. Scaling back on production may become unavoidable. All these issues create woes that spin through the economy as a whole.
The Economy Suffers
The economy experiences undesirable effects due to the presence of tariffs. Customers who spend more money on one product end up with less money to spend on other things. They also can’t put the spent funds towards investments or additional savings. In short, money gets sucked into the tariff quagmire.
If consumers choose not to spend money, then businesses suffer decreased profits. Businesses also experience other problems such as a reduced stock price valuation. Investors won’t be thrilled to see their portfolio lose value.
Will a country stand by and accept the imposition of tariffs without taking action? Usually, a country responds by issuing tariffs as a retaliatory measure. Now, the cost of exporting materials and products into another country becomes costly. At this point, the United States finds itself in a trade war with other nations. Trade wars can prove disastrous if lost. Honestly, evening winning a trade war might come with financial costs.
The Impact on Workers
When losing money, companies cut their losses. A business cannot stay in operation if costs become too high. A company may take the immediate steps to layoff workers. In other situations, a business may relocate overseas to escape the tariff situation. Either way, the United States’ workers lose their jobs due to the imposition of tariffs. Unemployment is hardly beneficial to the U.S. economy. Although tariffs may exist with the intention of helping the American worker, the worker may find him/herself harmed significantly.
Eventually, all the negatives associated with tariffs can add up to a recession. Both productivity and the gross domestic product decline. The economy drags as a result.
A Possible Upside
The U.S. could win a trade war with its tariffs. Foreign countries may open their markets. Existing trade imbalances might change and even out. All these reflect possible outcomes. Unfortunately, no guarantees exist for a positive end to a trade war. No one knows how things may turn out. The United States’ economy could suffer severely from tariff-imposed disasters.