By Professor Anthony Rivieccio MBA PFA 

Boy, so much talk about Tariffs!. Some say, get rid of income taxes and just impose tariffs for Government Revenue. Now, with Trump in office , and his mandate for ” tariffs over income tax ” many are now worried that ” import prices ” will have a dramatic effect on prices and the economy. 

Wait! Slow down! Let’s talk about some basics before we answer those last questions. But, let’s start off with: 

What is a Tariff?

A Tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and policy that taxes foreign products to encourage or safeguard domestic industry. 

What is an import taraff?

An import tariff, also known as a customs duty, is a tax levied on imported goods: 

Purpose?

Tariffs are a form of trade regulation that raise revenue for the government and increase the price of imported goods. This gives domestically produced goods a price advantage and protects domestic industry from unfair competition. 

How they work?

Tariffs are collected at the time of customs clearance in the foreign port. They can be based on the value of the imported good (ad valorem), the number or weight of imports (specific), or a combination of both. 

Who pays?

The initial payer is the party that pays the tariff when the goods enter the country, but the financial impact extends beyond them. 

Trade agreements?

Tariffs are sometimes lower or eliminated when there is a trade agreement between the importing and exporting countries. 

Other trade barriers?

Tariffs are one of several trade barriers that countries use to protect their domestic industry, along with quotas, subsidies, standardization, and licenses. 

Why?

Tariffs are typically imposed for protection or revenue purposes. A protective tariff increases the price of imported goods relative to domestic goods, encouraging consumers to buy from local producers, who are thus “protected” from foreign competition.

Well, we have a sense of what tariffs are ! Now, let’s get to the meat of the sessions? We will it effect prices & the economy ? 

Well now, if you have ever taken a basic economic class then you know our economy is created by,;

Consumer spending (60% of economy) + Business Spending (10%) , + Government Spending ( 20%)+ Trade (10 %) = Gross Domestic Product ( GDP)

That’s the US Economy ! Yes, trade represents 10%

Now, depending on which Country you live in, these factors could be totally different. So, in China, for example, Trade could be as high as 30-50% of their economy.

But wait, let’s check on the US side;

How much is collected ? 

Tariffs have not provided a meaningful share of revenue for the US government since the early 1900s  Existing imports duties on goods raised $80 billion last year, about 2 percent of the $4.44 trillion in total Federal tax revenue 

So, there you go. Yes before the 1900s , Trade was our predominant way of collecting revenue and creating domestic spending . Today, it’s 2-10%

So, let’s not get caught up on the hype! The Economy will be fine. How about prices? 

Do imports increase inflation?

A country’s importing and exporting activity can influence its GDP, its exchange rate, and its level of inflation and interest rates. A rising level of imports and a growing trade deficit can have a negative effect on a country’s exchange rate.

What effect does a tariff have on the price of imported goods?

Tariffs are taxes imposed on imported goods, often resulting in higher prices for consumers. They can impact various demographics, particularly burdening lower-income consumers and posing challenges for small businesses reliant on imported materials.

How did a high tariff affect the economy?

Over the long run, tariffs shrink the size of the economy by reducing work and investment. That’s because tariffs increase the relative prices of imported and protected goods, and after paying those higher prices, people have less income left to spend elsewhere.

So, in short, yes! But what could be the bigger danger? Unemployment could rise ! 

So, how how do you keep the economy flowing during this process ?. There are 3 ways; tax decreases,  Increases in Government Spending or lower interest rates!. Well I don’t think Trump is going to increase Government Spending but he is a tax decrease man . 

The Federal Reserve Board , in charge of interest rates, are now committed to keeping interest rates low ( for now because of stubborn inflation).

So , is there a possibility this will all work itself out? Let’s be frank! If you know the answer, maybe you should run for President. But either way I think it’s safe to say , that ” Tariff increases alone” as an action will have a minimum effect on prices and the economy – and I’m talking the US Economy not the Global one. Globally, well that’s another article !