Will tariffs completely ruin the economy?
- maanarha2024
- Jul 11
- 3 min read
Updated: Jul 26
London, ON
In recent times, there has been a lot of discourse about tariffs. With the increased relevancy of this in current politics, there is also a lot of confusion about what a tariff even is and how it will affect the economy. Most resources discussing this often use a lot of complicated economic theories and language. Therefore, this article will aim to explain tariffs in a way that is fairly understandable.
Tariffs are not a new policy; they have been commonly implemented in international trade since Ancient Greece. Consequently, there has been a lot of political and economic debate about them for a long time. In the past months, there has been rising discourse about tariffs from the U.S. due to the high percentages and a broader application of them on more products.
Tariffs are a type of tax imposed by a government on the import of goods. A tariff is typically measured in a percentage of a product’s price. In other words, it is an additional amount of money, which is paid when goods from other countries are bought.
Any firm that brings in a product from another country has to pay the tax to the government; however, since firms usually seek to maximize profit, they do not want to pay this extra amount, instead usually pass all or most of the additional cost onto the customers. Therefore, when a tariff is imposed on a foreign product, the consumers need to pay a higher price.
For example, Spain imposed a 20% tariff on Canadian products. If a clothing company from Spain were to buy a kilogram of wool from Canada that originally cost 10$ EUR, the Spanish company would have to pay an additional 20% of that price. They would need to pay 12$ EUR for the kilogram. One of the materials needed for their production of clothes is significantly more expensive; therefore, that additional cost would be passed to the customers in the form of higher prices. Although it does not seem like a high amount, companies will need to pay a lot more for their materials, considering the amount they need to produce. Besides the cost of materials, the company can face more challenges with production. Tariffs can affect the prices of materials needed to build the infrastructure, like aluminum and steel, or resources to keep the factories running, such as electricity. With all these factors in play, the price of their clothes would rise significantly.
Commonly, tariffs are imposed to promote the domestic economy. When the price of a product rises, fewer people are willing or able to buy it. Therefore, a company selling tariff-impacted goods earns less money with fewer people buying their product. Either the customers will start buying cheaper products, not impacted by the tariffs, which are made in their own country, or the firms will have to start using domestic resources to manufacture their goods. This can help promote the domestic economy with more money flowing within the country.
There are many arguments to be made for and against tariffs. The people who are usually for tariffs argue that it is a beneficial way to promote domestic economies. It provides firms in the home country with a better chance of competing with other foreign firms. Since the prices of the products of domestic and foreign firms are more similar, there is a higher chance that consumers will opt for the domestic goods. Additionally, any money collected from a tariff goes to the government. With more revenue, the government can invest in more infrastructure, social programs, etc.
On the other hand, the main argument against tariffs is the unaffordability of goods they may cause. Most companies choose to produce their goods in foreign countries or use materials from them to reduce production costs. This means that when a company tries to use domestic resources, the cost of production will increase, and therefore the price for the customers will too. There is also the possibility of retaliatory tariffs from other countries, meaning the country in which a tariff was imposed may impose a tariff back. This leads to reduced international trade, a very big source of money for many of the world's biggest economies. This can also stain the relationship between two nations, even leading to a trade war.
Overall, there are many arguments for and against tariffs to be made. Despite one's opinion, it is very important to remain educated on current economics since it affects us all.
Sources
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