Tariffs & The Economy

Tariffs have been the headlines a lot recently. Some people might be wondering what exactly tariffs are and how they affect the economy. Put simply, a tariff is a tax on foreign imports which is usually motivated by a desire to protect a domestic industry. An example might help flesh this out.

Let’s say a foreign company can make a profit selling cars for $20,000, whereas a domestic company can only make a profit on a comparable car by selling it for $21,000. The domestic company in this example is in serious danger of going out of business, because consumers will choose the less expensive of two products of the same quality. A tariff of $1,000 per imported car would force the foreign company to sell their cars for $21,000, thereby making the domestically produced cars competitive with the foreign cars. This keeps the domestic car manufactures in business.

So, Who Wins?

People are understandably attached to domestic industries. They produce jobs and keep money inside the country. This can make tariffs popular policies. But who pays the price for the tariff? Foreign companies obviously loose out, though the effects of the tariff don’t end there. Keep in mind that people are now paying $1000 more for their car because of the tariff. This means car buyers have $1000 less to spend on other the products sold by other industries. So, the consumer and other industries have to pay the cost of keeping the domestic car industry afloat.

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