What Are Tariffs?
Tariffs are a tax or duty imposed on imported foreign goods. They're paid by the company importing the product, although the foreign company exporting the product may thereby find its products too expensive to sell in foreign markets depending on how high the tariffs are.
The importing company paying the tariff may absorb the cost or pass it along to consumers, or a combination of the two. This may lead to higher prices beyond what consumers are willing to pay. It may also demand that its foreign suppliers reduce their prices to compensate for the tariff.
Tariffs are collected by a government agency at the country's ports of entry. To avoid tariffs, manufacturers often agree to build factories in foreign countries, which results in job creation in the country of destination.
Governments impose tariffs for several reasons:
- To protect specific industries and jobs from foreign competition, usually for self-protection or political reasons.
- To punish manufacturers in other countries by making their products too expensive.
- To force other countries to lower their tariffs.
- To raise revenue.
Tariffs are usually charged as a percentage of the value of the item being imported. For example, if the tariff rate on an imported bicycle is 5% and the price of the bike is US$200, the total import price would be US$210.
Tariffs have been around a long time. And before United States President Trump's election in 2016, the global trend was moving toward expanding international trade by lowering tariffs and other barriers to trade. Most countries prefer to keep tariffs low and trade lanes open to avoid a downturn in business, which would have a negative effect on revenue, profits and jobs as well as the overall economy.
The Trump administration launched a series of tariff increases—mostly against China but also Mexico, Canada and the European Union—aimed at narrowing the U.S. trade deficit with its trading partners. For the year 2018, the U.S. ran a total trade deficit of US$874.8 billion, which included US$1.7 trillion of exports and US$2.5 trillion of imports.
President Trump has also sought to use higher tariffs to punish China for what he believes is China's cheating on previous trade agreements and its alleged stealing of American intellectual property, ideas and techniques, particularly in the technology industry. He also wants China to buy more American goods and to stop the Chinese government from subsidizing the country's manufacturers.
In September 2018, for example, Trump imposed tariffs of 10% on US$200 billion worth of Chinese imports. He subsequently raised those to 25% on 10th May 2019. China in turn has retaliated by raising its own tariffs on goods imported from the U.S.
The U.S. and China have been engaged in on again-off again negotiations over trade and tariffs. Because trade has such an important bearing on the global economy, the talks have been a hot button issue affecting the price of global stocks and central bank policies for much of 2018 and 2019, leading to what some are calling a "trade war."
On 4 April 2018, for example, the S&P 500 gained 1.2% after dropping 1.5% after two high-ranking Trump officials said the White House was willing to negotiate on tariffs after China threatened to impose 25% tariffs on a variety of American imports, which followed the Trump administration announcing new tariffs on Chinese goods. Two months later, on 18 June, the Dow Jones Industrial Average dropped more than 1.1% after Trump threatened to impose tariffs on £141 billion of Chinese goods.
Tariffs are a tax or duty countries place on imported goods. Companies that are importing the products pay the tariff and can absorb the cost of the tariff, pass it on to consumers, or ask the exporting company to lower their prices to cover the cost of the tariff. Until U.S. President Trump was elected in 2016, tariffs weren't much of an issue, as most countries preferred low tariffs in order to facilitate global trade. However, Trump's tariffs, which are particularly aimed against China, seek to reduce the U.S. trade deficit and to force other countries to buy more American products.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…