On Tariffs...
My attempt at explaining how they work and who they'll hurt
I really didn’t want to spend my Sunday morning writing about tariffs, but it’s clear that a lot of people still don’t understand them. That’s okay, there’s been a ton of misinformation out there about what they are, how they’re paid, who pays them, and how it will impact consumer prices.
I’ve built my reputation from making complicated topics easy to understand, so I’m going to give this a shot. I’m not an economist, but I’m good at parsing information from reliable sources and experts, and breaking it down so that other people can understand. I’ll try to include source links where I can, but a lot of this just comes from absorbing information on a day to day basis.
What are tariffs?
Tariffs are consumption-based taxes. Other consumption-based taxes include things like sales tax, the tax on gas and other fuels, tobacco taxes, etc.
The thing about consumption-based taxes is that the more you buy, the more you pay.
When tariffs are used strategically, people can stop spending money on the things they’re used on (or at least minimize the amount they spend). But when blanket tariffs on virtually everything imported are put in place, it’s almost impossible to avoid them. Everyone ends up paying the tariffs.
Who pays tariffs? And when? And how much?
Tariffs are paid by the person or company importing the product, at the time the product is imported (not when it’s purchased—this is actually important and I’ll explain why in just a second). That means if a product is being imported into the US, then the US-based person or company is the one to pay the tariff.
Let’s give an example: you’re a small business that orders a particular product from the EU, because there are no great US suppliers for the same product. Your typical order is $20,000, and much of that product is pre-sold to your customers, who pay you when they place their pre-order.
So you collected the pre-orders and the money for them and placed the order. Before the order reached the US, a 20% tariff on goods from the EU was enacted (this is why the when part of the equation is important—a lot of businesses pre-order things months in advance and are now getting hit with significant additional costs).
This means that to get your order out of customs, you have to pay an extra $4,000.
Since your customers have already paid you, you have a couple of options of what to do about that extra $4,000 cost:
You can insist that your customers pay an additional 20% fee on top of their pre-order. This upsets a lot of your regular customers, who may stop doing business with you.
You can eat the additional cost, cutting into your already-slim profit margins. While the 20% tariffs might be something you can absorb, what if it was a shipment from a country with a 40% tariff? You’re not operating at a loss.
You can refuse the shipment and hope that the original seller will give you your money back so that you can refund your customers. And if they don’t, you’ll have to figure out how to refund your customers out of your own pocket (or hope they’ll take store credit). But you just burned bridges with that supplier.
None of those options is good, but you’ll have to pick one. And imagine if the order was for $250,000 or $500,000 or $1,000,000: you’d have to pay an extra $50,000-$200,000 to get your goods out of customs. Very few businesses can afford to just eat that cost.
For a real-world example of this happening, check out this Thread from GrapeyLyle, a wine importer who’s dealing with this exact thing (he’s got a lot of good info on tariffs and how it impacts US businesses on his account).
Will tariffs help lower other taxes?
This is an argument I’ve seen floated around quite a bit, that tariffs will help lower things like the income tax, and so will end up benefiting everyone.
First, because tariffs are a consumption-based tax, they hit lower-income people much harder than those with higher incomes.
Let’s say you earn $50,000 per year. That’s just enough to get by in a low-cost-of-living area. You’re spending pretty much everything you earn in order to live. And let’s say half of those expenses are subject to tariffs (we’ll use an average of 20% additional cost due to tariffs, though it could certainly be more). If half of your expenses go up by 20%, that means you’ve got to either take on a second job to make up the difference or cut your budget by 20%. Neither one is easy to do. And you’re paying an additional 10% in taxes.
Now, let’s say you earn $500,000 per year. You’re doing well pretty much anywhere in the country, but you’re not in the 1% by any means. You like to buy things that are more expensive than the person earning $50,000 but you’re also spending money on things like trips, investments, experiences, etc.—things that aren’t subject to tariffs. Let’s say that you spend $60,000 (more than twice as much as the first example) on things that are subject to tariffs—12% of your annual income. If we use the same 20% additional cost from tariffs on that, your tax rate has only gone up by 2.4%—you’re paying a significantly lower tax rate than the person earning $50,000 per year.
In all likelihood, tax breaks will be done based on income bracket, and if recent tax breaks have been any indication, the wealthier will get a bigger tax break than anyone else (and lower income brackets may see a tax increase). But for simplicity sake, let’s say they reduce all the tax rates for every bracket 5% (not 5% of the existing rate; I may be phrasing this wrong, but basically if you were paying a 15% tax rate your rate would go down to 10%). The person making $50,000 per year is still paying an additional 5% tax rate from the tariffs. However, the person who’s making $500,000 per year just saw a reduction in their overall taxes by 2.6%.
This is why consumption-based taxes are regressive—they tend to hit lower income households much harder than higher-income households.
But won’t tariffs help American businesses be more competitive?
When tariffs are used strategically, they can absolutely help domestic industries. Let’s take the sugar industry in the US as an example:
Sugar cane is not widely grown in the US, but there is significant production in parts of Louisiana. And a lot of it comes from family farms. However, those farms aren’t capable of producing all of the sugar needs for the US. And sugar from overseas (namely parts of South America) is cheaper than sugar produced in the US. So those US farmers would have a hard time competing on an open market with producers from overseas.
So there’s a tariff system in place that helps keep those American farms competitive. The tariffs are done in a tiered system, with a certain amount of sugar able to be imported at a low tariff, and after that the tariffs get higher.
The downside to this system is that sugar is more expensive for consumers (those tariffs are getting passed on), but it’s something we’ve accepted (probably without even realizing it) in order to support family farms here in the US, while still allowing our sugar consumption needs to be met by foreign producers.
This is an example of a strategic tariff that’s meant to prop up a domestic industry.
Strategic tariffs can also be used to put pressure on foreign producers to negotiate on trade issues. Strategic tariffs can be used to get certain industries in certain countries to put pressure on their governments to make a deal. They’re usually short-lived and are only used to force a negotiation to happen.
That’s not what’s currently happening, though. Blanket tariffs imposed on virtually every country in the world do not support American businesses, and can actually drive up their costs. It can also cost American jobs due to those increased costs. And when the prices go up across the board, there’s less incentive for countries to negotiate on economic issues.
How do blanket tariffs hurt American businesses? And American consumers?
Nothing is completely “Made in America” these days. Every industry relies on foreign imports to do business. Farmers rely on potash from Canada for fertilizer. Manufacturers rely on parts, materials, and machinery from other countries. Retailers sell imported goods.
When the price of the inputs goes up, the price of the products goes up. And the people buying those products are the ones who eventually end up paying the extra.
I have a friend who started a vinyl record pressing plant a few years ago. It’s one of the few manufacturers like that in the US. The machinery to press records isn’t made in the US—it’s primarily made in Germany. Which also means that parts to fix or maintain that machinery need to be sourced from Germany. If the 20% tariffs had been in place when he started the business, he might have decided that it wasn’t economically viable to even start.
There are millions of examples like that, all over the US.
Let’s say that there’s some unicorn company out there that doesn’t rely on foreign inputs in any meaningful way to produce whatever it is they produce. The foreign imports they rely on only make up, say, 1% of their cost of doing business.
If all of their competition has raised their prices, say, 10% because of increased costs, then that original company has a fiduciary responsibility to their shareholders to also raise their prices and maximize profits. They might only raise it 9%, so that they’re the cheapest option. But that still means US consumers are going to pay at least 9% more. And when that happens in every industry, on every product, that adds up.
Why can’t we just stop relying on foreign imports?
There are a few reasons we can’t just instantly switch all of our production to the US with US-made parts and materials.
Let’s talk about raw materials first. The US just doesn’t have all of the raw materials needed to make all of the products we make. Some of those materials are only available in certain parts of the world.
Second, the US doesn’t have the manufacturing infrastructure we had 50+ years ago. We can’t just start producing more things. We’d have to rebuild factories (which would require importing materials, equipment, etc.). We’d have to rebuild shipping infrastructure to stop revolving around ports. All of this takes money and time. You can’t open a factory overnight. And all of that money and time would mean increased costs down the road for everyone.
Third, overseas companies often own the patents for components of some of our favorite products. Apple doesn’t own the patents for every component that goes into the iPhone. Some of those are owned by companies overseas who produce the parts and sell them to Apple. Apple can’t just start manufacturing those things here, at least not without paying licensing fees on top of the manufacturing costs (which are going to be higher in the US due to our higher cost of living, labor laws, etc.).
And finally, our labor laws and higher wages make things produced here more expensive. Even when US companies are contracting with ethical manufacturers who pay livable wages overseas, they’re still saving money. Partly because a livable wage in many parts of the world is a fraction of what a livable wage is here in the US. When something that has been produced in a factory where the highest-paid worker is making $5/hour is suddenly moved to a factory where the lowest-paid worker is making $20/hour, that cost is shifted to the end-buyer (and is marked up for profit at every point along the way). And suddenly a “livable wage” in the US isn’t $20/hour anymore—it’s $40+.
So what does this all mean? What’s the purpose?
While there’s no definitive answer to this question, one theory I’ve seen floated around from a lot of different sources is that the point is to create chaos in the market so that the rich can take advantage of market dips and crashes to buy up more stock and enrich themselves further.
A more extreme theory I’ve seen is that they’re not just trying to game the stock market through chaos, but to actually bankrupt as many small and mid-size companies (including farms) as they can to buy those assets for pennies on the dollar.
I think both are likely on the right track, given the rhetoric that’s come out of the government surrounding these tariffs.
I definitely don’t think that the motivation is to prop up the average American or the average company in the US. I don’t think it’s to lower our taxes overall, as shown in the example earlier in this piece.