Much of what we hear in the media today concerns discussions, arguments, and opinions about tariffs. What is a tariff, and why is it so important in history?
A tariff is a tax imposed by a government on goods imported from other countries. It's essentially a fee the US importer pays to the US government when importing foreign products to sell in the US. Tariffs are often levied as a percentage of the imported good's value.
A bit more detail. A tariff is a tax that importers pay on goods made in foreign countries, NOT the country of origin or the foreign manufacturer of the product. Example: My business is selling sporting goods in the US. Before tariffs, I could buy a pair of running shoes made in China for $100 and sell them in the US for $150, thus making a $50 profit. But if the tariff becomes 50%, I will pay the Chinese factory $100 for the running shoes, and I (as the importer) will pay the US Government $50 for the tax/tariff. This identical running shoe costs me (the importer) $150 to purchase.
Now what? The importer, the sporting goods store, can either 1) keep the price the same and sell the shoes to you for $150 and make no profit – that is dumb, 2) increase the retail price to $175 and maintain a smaller profit (make less money but at least some), or 3) increase the retail prices to $200 to maintain the profit margin. Chances are retail prices will increase, and we consumers will pay more for the same item. Therefore, we, the consumer, ultimately pay the tariff. Not the importer, not the foreign factory and not the exporting country.
Net result. Prices go up…this is inflation. Or, people buy less because things cost more …the economy slows down…and we could get a recession. This all sounds bad, right? Maybe – reference the parable of the Chinese farmer from my March 13, 2025, post.
There are two different reasons for tariffs: 1) to encourage “Buying US” rather than foreign, and 2) to protect American goods and manufacturing that already exists.
Let’s start with the first reason for a tariff: to encourage the purchase of US goods. Keeping with the sporting goods retailer from earlier. Let’s say the sporting goods store can buy that pair of shoes from China at $100 or buy a product of equal quality from a US manufacturer for $110. Without tariffs, the sporting goods store would buy Chinese shoes for $100 and sell the shoes for $150 for a $50 profit. The US-made shoe costs the retailer $110 to purchase, and it retails for $160, resulting in the same $50 profit.
Now, a 50% tariff makes the identical Chinese shoe $150 for the company to purchase and would need to be sold for $200 to maintain the same $50 profit. The “Buys US” encouragement occurs because that same customer could purchase the US-made running shoe for $160. If given the choice between the $160 running shoe and the $200 running shoe, the customer will pick the US-made running shoe because it is cheaper. The retailer would still profit the same $50, but everyone is happy.
The above scenario works if a US factory already makes the shoes for $110. Without existing US factories and supply chains, we would have to build them. That would stimulate construction, jobs, and therefore the US economy. Maybe.
You have to consider the cost and how long it takes to build the factory. Will there be workers for the factory, and what wages will be needed to attract them? While all this is being figured out, we are paying higher prices for foreign stuff or not buying it, and the economy suffers.
The second reason for the tariffs is to protect American jobs and manufacturers already in this country. An example of this is the automobile industry.
The Chinese company BYD is the world's fastest-growing electric vehicle (EV) manufacturer. In 2024, BYD surpassed Tesla in selling the most EVS globally. Why can we not buy them in the US? Before May 2024, there was a 25% tariff on BYD cars imported to the US. This was to make them more expensive than US-built EVS. Then, in May 2024, President Biden increased that tariff to 100% (specific only to that product). Why? BYD had developed a lower-cost model that would compete with US EVS and gasoline models. This increased tariff protected the US auto companies and workers, making both EVS and gas cars less competitive with foreign products. This is an example of a specific tariff on a single product.
In summary, tariffs are used to increase prices on foreign products. This, in turn, protects Americans and American companies that are manufacturing those same products in US factories. However, if America does not already make the same products, tariffs will increase the prices the American consumer pays (inflation) and slow down our economy.
I could go into how blanket tariffs of 10% to 140% on everything from every country are very different and complicated, but I won’t. These broad (non-targeted) tariffs are typically political, used as a negotiating tool, etc. Call me and we can discuss it.
Oh yes, then there is the discussion of retaliatory tariffs by other countries on products manufactured in the US and how that impacts (hurts) American companies. Or the decline of the US dollar against other currencies due to the lack of confidence in US global leadership, which drives the price of US Treasury debt down, leading to higher interest rates. But too much to write about. Call me and we can discuss.
Maybe all that is happening will ultimately be a good thing. Again, maybe … reference the Chinese farmer from March 13, 2025.
Hang tight. Manage your cash reserves and cash flow. It is always a good time to invest the money you won’t need to spend in the next few years. Yes, even now is a good time to invest…in my opinion.
Thanks for reading. Feel free to share this with others.
Most important: Be aware that Congress is attempting to push through a budget with cuts to Medicaid, reduced or no funding for programs like Head Start, Meals on Wheels, SNAP (food assistance) and other social programs to offset the tax cuts for the upper tax brackets. If you have an opinion, contact your Congressperson. To find out who represents you and their contact info, go to:
https://www.house.gov/representatives/find-your-representative
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