How Do Tariffs Work and Who Really Pays for Them?

The word “tariffs” seems to be inescapable these days thanks to President Trump and his – …shall we say… erratic? – tariff trade policy. But how do tariffs work? What even are they? And, most importantly, who pays for them? If you didn’t study Econ in college then don’t worry, we’re here to help fill you in. This guide will discuss everything you need to know about tariffs and how they can impact your money.

What are tariffs and how do they work?

A tariff (or duty) is a federal tax levied by governments on imported products. This tax is applied at the border or port when goods are entering into a new country. According to the University of Chicago, tariffs have three main uses:

1. Raise money for the U.S. government

2. Assist domestic producers 

3. Penalize foreign firms or countries 

This topic recently reentered the national conversation after President Trump slapped tariffs on dozens of countries around the world (an unprecedented move).

Tariffs have lots of economic and political implications. But, for you, the takeaway is simple: tariffs usually mean pricier products. 

Who pays tariffs?

Technically speaking the company or organization importing a good from another country is responsible for paying the tariff. However, this cost is usually passed onto consumers through higher prices. Let’s look at an example of how this works.

Let’s say that your local coffee shop imports most of its coffee beans from Brazil. If the US announces a 20% tariff on all imports from Brazil then your coffee shop’s bean costs would increase by 20%. To offset this higher cost, your coffee shop will almost certainly raise its prices, meaning that your daily coffee might jump from $5 to $6.

Some companies might choose to pass on the entire cost of the tariff to customers while some may only pass on a portion of the cost. It just depends on the company. 

So, who pays tariffs? In most cases, you do, the consumer.

What are reciprocal tariffs?

Reciprocal tariffs are specific tariff rates necessary to balance trade deficits between one country and another. The bulk of the tariffs that President Trump has announced are reciprocal tariffs designed to balance out trade deficits with major trading partners.

Types of tariffs

There are a few different types of tariffs to be aware of:

• Ad valorem: A tariff charged on goods based on their value rather than their quantity or weight.

• Specific: A tariff charged as a fixed amount per quantity (such as $100 per ton).

• Compound tariffs: A tariff charged that is a combination of a fixed amount and an amount based on the value of the goods (a combination of ad valorem and specific)

What’s the purpose and function of tariffs?

Tariffs are commonly used to make foreign products pricier, which makes domestic products more attractive by comparison. 

Countries will also use tariffs to generate revenue for the government, to try and balance trade deficits, or as a negotiating tactic to achieve other objectives.

How do tariffs affect the economy? 

Tariffs have a widespread impact on the economy. They can lead to higher prices for commonly imported items like gas, clothing, electronics, or coffee. These higher prices have a ripple effect throughout the economy, increasing prices and causing consumers to spend less money which results in less economic growth. 

The Economic Policy Institute states that tariffs can play a key role in a diversified trade policy. But, using them as a centerpiece of a national economic strategy can cause more harm than good. Negative repercussions of this strategy include damaging relationships with other countries, retaliatory tariffs, boycotts, full-blown trade wars, and shifts in global supply chains. 

How do tariffs affect consumers?

Tariffs usually lead to higher prices for consumers, since imported goods become more expensive. In some cases, there may also be fewer product choices available if foreign products become too costly to sell.

One strategy to navigate the tariffs

One way to address tariff-related stress, or future stressors that may arise from tariffs, is to get as financially, physically, and mentally healthy as possible now.

MoneyLion and Mastercard’s recent Health is Wealth report determined that 66% of U.S. adults reported negative physical symptoms due to financial stress. 59% of adults also reported that they skipped a health-related activity due to financial stress. Financial stress and physical/mental stress are connected. Join MoneyLion and start sharpening your financial knowledge daily, and consider getting FinFit in the process! 

Getting rid of financial stress is much easier said than done. But, one small way to help reduce financial stress is by improving your financial literacy. According to our Health is Wealth report, 75% of adults believe they’d be healthier and less stressed if they improved their financial literacy. Reading this blog is a great start! But, be sure to explore the rest of the educational resources that MoneyLion has to offer.

FAQ

What items are affected by tariffs?

Items that are commonly imported from other countries will be affected by tariffs. Some products that tariffs will likely impact are leather products, clothing, crops, metals, and rice.

Are tariffs good or bad?

Tariffs can be good or bad depending on the situation. They can protect local industries by making imported goods more expensive, but they can also raise prices for consumers and lead to trade wars. In general, tariffs are typically viewed as negative because they restrict free trade.

Who benefits more from tariffs?

The government imposing the tariffs typically benefits the most because it enjoys additional tax revenue. Domestic producers may also benefit because they face less competition from foreign goods.

Do tariffs affect interest rates?

Tariffs can affect interest rates indirectly. If tariffs hurt economic growth then the Federal Reserve might lower interest rates to stimulate the economy. Learn how you can take advantage of potential interest rate drops.

Do tariffs cause inflation?

Yes, tariffs can cause inflation. By making imported goods more expensive, tariffs can raise overall prices for consumers which has ripple effects throughout the economy.