You can’t turn on the news these days without hearing about tariffs. But what exactly are tariffs? And how do Trump’s tariffs on China impact our economy?
Licensed CPA Riley Adams explains that a tariff represents a levy against imports and serves as a measure for raising the price of a good. Let’s explore what that means to us.
How Tariffs Work: An Example of Uber and Lyft
The short-term effects of tariffs are generally favorable, as more local companies get an opportunity to attract consumers to their goods and increase their sales.
In the long-term, however, tariffs can have negative impacts. Tariffs can decrease the purchasing power of consumers and create a monopoly of local companies.
Financial blogger Jessica Chase explains this concept with a helpful example. If the U.S. government imposed a tariff on Uber, Lyft would get an advantage because Uber would have to raise its prices.
However, if Lyft’s quality of service were to decrease, the consumers would no longer have Uber as an option. In the end, the ride-sharing industry would come under the monopoly of Lyft. Uber would be priced out, and the quality of the service would decrease overall.
By putting a tariff on China, President Trump has a goal of increasing the sales of local goods, which have not been able to compete with the quality and price of Chinese goods for some time.
How Does the Free Market Work?
Chase explains that through capitalism, or the free market, consumers only benefit when companies have to face competition from other companies. Competition among companies keeps prices low.
By imposing tariffs, the employment rate goes up, but the price of goods goes up as well. This could result in crimes such as smuggling goods under the tax.
The recipient of the tariff usually starts to include a middleman. In the case of the China-U.S. trade war, China has the option to export to a free or low-tax country like Singapore or Dubai. From there, it can re-export goods to the U.S. tariff-free because they are not directly from China.
So…Are Tariffs Good or Bad?
Generally, economists call for a free market so that prices stay low.
Lately, talk of tariffs has been prevalent despite the condemnation by economists. Tariffs are called a “protective measure,” but what they really protect us against is something consumers would never expect: low prices.