What is a tariff, and why should you be worried about it?

Credit: Mark Wilson

Credit: Mark Wilson

In a series of tweets Friday, President Donald Trump announced new retaliatory tariffs against China, bumping up taxes by 5 percentage points.

>> MORE: China, Trump ratchet up tensions with new tariffs

Here’s a look at trade tariffs and what they do.

What is a tariff?

A tariff is a tax on imports or exports that increases their prices. Tariffs are used by governments to make foreign products less attractive to consumers in order to protect domestic industries from competition. Money collected under a tariff is called a duty or customs duty.

What types of tariffs are there?
There are two types of tariffs – an ad valorem tariff and a specific tariff.

An ad valorem tariff is a tariff that is a fixed percentage of the value of an imported good. If the price of the imported good goes up, the ad valorem tariff goes up. If it goes down, the tariff goes down.

For instance, if a company exports an item to the United States costing $50 and the ad valorem tariff on that product is 20 percent, the company would have to pay the tariff -- $10 in this case -- to export the product to the U.S. If the price of the item goes up to $75, the company will have to pay a tariff of $15 to sell the item in the US.

A specific tariff is a fixed amount of money placed on the item no matter the cost. Say there is a $20 specific tariff on that $50 item. The company exporting the item to the US would have to pay $20 to sell the item in the U.S. If the item goes up in cost to $75, the company will still have to pay $20 to export the item.

Why should I care if the US government puts a tariff on items? The manufacturer pays for that, right?

Sure, manufacturers pay the tariff upfront, but the cost of the tariff will be passed along to the consumer. Or, if the cost of the tariff is too high for those exporting goods, then they stop exporting goods.

Tariffs affect the cost of goods you buy, and the U.S. buys many more products than it sells.

So, why slap tariffs on goods if it will hurt the US consumer?

The theory is that as goods made by people outside the U.S. get more expensive, manufacturers within the country will either increase their production of the product or other companies will begin to produce the product, thus strengthening the U.S. economy.

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