How Tariffs Affect the Prices You Pay
Unless you're an economics professor, you've probably heard the word "tariff" more in the last month than the entirety of your life up to this point. And while tariffs may feel like a concept above your paygrade, as a consumer tariffs can have a real impact on your bottom dollar.
So let's take a look at tariffs: what they are, how they're used, and how they affect the cost of goods and services.
What are tariffs?
Tariffs are a tax on imported goods and services. This includes everything from Brazilian bananas to French wine to Indonesian textiles.
Tariffs can be imposed on particulars items, on categories of items, or any goods or services being imported from a particular country. Tariffs are typically charged as a percentage of the good's value (ad valorem) or as a fixed amount per unit.
Who pays for tariffs?
The importer pays the tariff. If you sold maple syrup in the United States and a 25% tariff was in place for all imported Canadian goods, then $1 million worth of maple syrup from Canada would cost you an additional $250,000 before you could sell any of that syrup in America.
Accordingly, you would almost certainly need to increase the price of the maple syrup you sold in order to cover the costs of the tariff. As a result, tariffs tend to increase the price of impacted goods and services.
In other words, the importer pays the tariff initially, but you as the consumer will likely end up paying for the tariff through higher prices.
Why are tariffs used?
There are a number of reasons why a government might want to impose tariffs:
- Regulating trade by decreasing the amount of foreign goods sold
- Protecting domestic businesses and interests by discouraging imports
- Increasing government revenue
- Creating leverage for negotiations
Tariffs can certainly be an effective tool in the right circumstances, but it's one that comes with a lot of potentially negative ripple effects.
How will tariffs impact me?
As you can imagine, slapping a hefty tax on imported goods can create havoc in the economy.
Higher prices
The most immediate outcome is the most obvious: imported goods will cost more. Importers will almost certainly pass those costs along to you, the consumer.
That's not all: even domestically produced goods may cost more. That's because tariffs don't just impact finished, ready-to-sell products, they also impact raw materials. Hefty tariffs on steel would impact the price of American-made automobiles, for example.
Reduced choice
Depending on the math, the tariffs may make certain imports unviable, limiting your options to only domestically-produced goods. This could make certain items (including necessities) unaffordable or completely unavailable.
Retaliation
If you're the exporter, tariffs are bad for business. And if the exporter is an entire country, they may decide to retaliate with their own set of tariffs, making importing and exporting extremely costly, driving up costs further.
How can I prepare for the impact of higher prices?
Hopefully as you're reading this we're not in the middle of a massive trade war. But if massive tariffs do become a reality, what can you do?
Tighten your budget
Identify and reduce non-essential expenses in order to create maximum flexibility in your budget. Prioritize necessities, including housing, food, and healthcare costs.
Shop smart
If you're not the type to pay careful attention to what you're buying, now may be a good time to start. Monitor prices, make use of sales, and be willing to alter routines and preferences to match cost trends.
Address debt as soon as possible
If the cost of living keeps increasing, the last thing you want weighing you down is debt payments and interest costs. The best time to address debt is before the next big financial crisis. Assess your debts and if you're not making the kind of progress you want, consider changing your strategy.
Need help getting our of debt? Do Debt Different with MMI! We can help get you out of debt 7x faster than doing it alone. Learn about debt management plans today.
