What Is a Tariff? And How Could Trump’s Tariff Plan Affect You?
Post-election, the word “tariff” has entered our daily lexicon. We have politics to thank for that—according to the Tax Foundation, President-elect Trump has promised a 10-20% tariff on all imports, a tariff of at least 60% on Chinese imports, and a 25-100% tariff on Mexican imports.
What are tariffs?
Tariffs are taxes placed on goods imported from other countries. For example, a 60% tariff on Chinese imports would mean that when a $100 Chinese product arrives at the US border, the person or company who bought the product will have to pay $60.
Who pays for tariffs?
While President-elect Trump has stated that the foreign country where the goods come from will have to pay the tariff, the reality is that whoever imports the product must pay the tariff, and because companies want to keep their profit margins, the cost of those tariffs will likely be passed on to U.S. consumers.
For example, a company that usually buys a $100 product from China to sell for $200 (making a $100 profit) will now spend $160 on that same product. To keep the $100 profit, the company will need to charge $260 for the same product.
Why are tariffs used?
Tariffs are intended to encourage U.S. companies and U.S. consumers (like you!) to switch to buying and selling U.S.-manufactured goods. For consumers, this means buying U.S.-made goods, which are typically more expensive than foreign goods. For companies, this means moving their manufacturing to the U.S. and no longer buying materials from other countries. If any part of their production uses materials from another country, they are subject to tariffs.
Isn’t it good to make companies manufacture in the U.S.?
In theory, it is good to encourage businesses to produce their products in the U.S.! However, historically, tariffs have not been successful in increasing manufacturing in the U.S. Due to U.S. labor laws and regulations, the cost of producing goods in the U.S. is too expensive. The U.S. also has a shortage of skilled workers to fill manufacturing roles, and our manufacturing is less efficient. Even if companies do move manufacturing to the U.S., most will still buy cheaper materials abroad and pass the tariffs onto the consumer.
How will tariffs impact you?
Expect higher prices on imported goods and domestic products that use imported materials. Trump’s tariffs during his first term (continued for the most part by the Biden administration) ended up costing the average household an extra $200-$300 annually. The National Retail Federation (NRF) estimated the new tariffs could cost American consumers about $2,600 annually per family. Incomes could also be affected, particularly for the lowest-earning fifth of Americans. Peterson Institute for International Economics estimated that new tariffs would lower the incomes of Americans by about $1,700 per year for a middle-income household.
What can you do about tariffs?
Don’t panic! This is just speculation until policy changes are made, so things could change.
Stay up to date on tariff policies from the new administration so you can plan accordingly. Follow your favorite news source or the Financial Gym to stay informed about changes as they happen.
Call your senator and representative to tell them that you oppose tariffs: While there is precedent for presidents to impose tariffs through executive power alone, more powerful voices in opposition to the tariffs could have an impact.
Start budgeting now for potential price increases: To put your budget in the position to withstand higher costs, avoid making big decisions that will stretch your budget until we know more.
Prioritize your financial health as much as you can: A solid financial foundation (including an emergency fund) will help weather any wider economic effects of changes to tariff policies.
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