Tariffs: What Should I Know?
“True Holiness does not mean a flight from the world, rather it lies in the effort to incarnate the Gospel in everyday life, in the family, at school, at work, and in social and political involvement.” -St. John Paul II
Tariffs are taxes on imported goods. You might also hear them called customs duties or import duties. The United States has used tariffs since the 1700s for various reasons. George Washington signed The Tariff Act of 1789 into law on July 4, 1789 with the goals of protecting trade and raising funds for the U.S. government. As our nation has grown, tariffs have played different roles. Current opinions on whether or not they are a good method for raising funds, protecting U.S. made goods, and managing foreign relationships are vast and varied. This article attempts to lay out the reasoning on both sides and so illustrate the complexity of the situation we find ourselves in with tariffs today.
As Catholics, we are called to be educated and informed so we can help shape our world into a better place. Tariffs are currently a very timely topic, but as I completed my research for this article, I learned not only that they have been used in the United States since the beginning of our country, but recently they have been used by both President Biden and President Trump. They are not simply a Democrat or Republican policy, but something we need to be aware of no matter who is in the Oval Office.
Raising Money for the U.S.
Because a tariff is a tax, it inherently should provide some revenue for the government imposing it. However, in modern times, tariffs are more frequently used by less developed countries as a method of building their economies. . Usually, developed countries rely on income tax to produce the majority of their income. When a country has become stable enough to enforce an income tax system, it will move away from or reduce tariffs to allow for greater international trade opportunities, lower prices on goods for consumers, and better international relationships.
Who ultimately pays the tariff continues to complicate this issue. While technically the tariff is paid by the U.S. importer purchasing the goods, according to an article on Fortune.com, the cost of tariffs can fall in part or whole on three different groups: the overseas producer, the U.S. importer, or the consumer. For example, if a 10% tariff is imposed on a good from China, the Chinese company could lower the price by 10% to maintain the same cost for the U.S. importer in order to maintain its client. The Chinese company could also keep the price the same and the U.S. importer would be responsible for the 10% tariff. The U.S. importer could then lower the price of the final product by that 10% to maintain the current cost, or they could pass that cost on to the consumer who would then have to pay 10% more for the item they are purchasing. The 10% tax could also be divided among all three. According to the same article on Fortune.com, there are exceptions, but typically the consumer ends up paying for the tariffs because the cost of the goods rises which also leads to inflation and more financial stress for the consumers. More financial stress tends to lead to less economic growth.
Protecting U.S. Made Products
Tariffs can encourage manufacturers and consumers to buy more locally made products. If the cost to import something becomes higher or even equal to the cost to buy it locally, manufacturers will switch to local sources. However, this will still lead to increased costs for the consumer. Moreover, not everything is manufactured in the United States, so there isn’t always a domestic option.
This begins to beg the question: why are foreign prices less than those in the United States? Is it the result of poorer working conditions, lower wages, or lower costs of living in other countries? Every human is endowed with a God given dignity that should not force them into conditions that are unsafe or unfair. At the same time, do people in the U.S. have enough money to pay more for basic necessities? Most experts agree that it is the poor in the United States who feel the biggest hit of rising prices, but honestly even the middle class has felt the hit of inflation and rising grocery prices. There is not an easy answer to this situation.
To make matters even more complicated, countries will often retaliate against each other with tariffs. In the current situation, the U.S. economy could be hurt by this retaliation. U.S. producers will not be able to sell their products abroad as easily or could have additional costs involved as discussed above.
Thinking about this, we may begin to question: is it better to keep our money, goods, services, etc. local? We are in a world that is connected globally. We can know what is happening around the world within minutes or - at most - hours of something occurring. We can do business entirely virtually with video calls, emails, and phones. We can purchase goods directly from sellers in other countries. On one hand, this is amazing. We have more options and opportunities than ever before. If we live in a small town, we can still have a big impact. If we are a little different, we can find people across the ocean who might share our oddities. On the other hand, we are sometimes less connected to our physical surroundings, spend more time on screens, and may question how many real in-person friends we have. As for goods, purchasing globally expands our options and often helps us save money. On the other hand, it can be harder for small locally-owned businesses to operate, and we can lose hands-on customer service provided by someone local. Again, the question is not an easy one to answer.
Managing Foreign Relationships
Tariffs have often been used to manage relationships with foreign countries. According to cfr.com, “‘Antidumping’ tariffs are applied when a U.S. firm proves that a foreign firm is selling products in the United States at lower prices than they charge at home, often in an attempt to drive competitors out of an industry before raising prices. In both of these cases, tariffs are meant as a penalty that allows domestic producers to compete as if the market had not been distorted. Critics, however, claim that even these tariffs are often disguised protectionist policies.” Certain industries, like steel and aluminum, also have higher tariffs to protect national security. Because these materials are essential for military uses, tariffs can ensure that a country can provide these products locally, if needed, in a time of war. If a country were to rely entirely on importing these materials and then found itself at war with the providing country, they would be at a severe disadvantage.
While both of these policies are based on good intentions, they can be harmful if not applied appropriately. Antidumping tariffs do protect US companies. However, proving that another country is actually trying to flood the U.S. market with lower priced products to put a local company out of business, is a hard task. We also need to protect our ability to defend our nation and provide for our own needs should an international crisis or war happen. Ensuring that we don’t rely too heavily on other countries allows us to have freedom from foreign policies and disruptions. On the other hand, certain resources are easier to source in other countries leading them to be less expensive. There is also something to be said about being able to work well with other countries and be team players.
As you can see, there are many sides to tariffs, some more valid than others. They have benefits and drawbacks as with anything. Whether or not they will be an effective way to solve some of the current U.S. issues remains to be seen. It is good to remain educated about the policies of our nations and to continue to pray for our leadership and culture. At the end of the day, God must be at the center of everything or nothing will stand.
Erica Mathews is a CERTIFIED FINANCIAL PLANNER™ Professional with Financial Counseling Associates, a family-owned financial planning and investment management firm. She helps relieve financial stress with organization, automation and a plan, helping others manage their finances so they can live as God is calling them to. She lives in Colorado with her husband and four kids; they love CrossFit, rock climbing, gardening, and exploring nature. Erica’s email is erica@fca-inc.com