Import Duties and Tariffs: How They Can Impact You
By: Peter Coll
Much of the recent media attention has centered on tariffs, reciprocal tariffs, and the on-again, off-again impacts on industry and consumers. For most, import duties and tariffs are beyond our control. It is, however, important to understand what a tariff is and how it may positively or negatively impact you.
Before we begin, I am Switzerland—forever neutral and taking a view from all sides with generic examples.
What Are Tariffs?
Tariffs are economic tools that can be used in many ways. They are essentially a surcharge placed on a product coming into a country. They are intended to protect domestic producers of similar products or serve as a negotiating tactic in international trade. Tariffs are paid by the importer. Sometimes, the seller may offer a small discount to offset the tariff and share the cost burden. This ensures continued purchases of their product. The rest of the burden is carried by the buyer. The buyer may choose to absorb the additional expense—reducing their profit—or pass the cost on through the distribution chain.
How Do Tariffs Aim to Protect Producers?
Depending on a country’s cost of living, climate, natural resources, regulations, or specialized industries, each country can produce certain products more efficiently than others. When two countries have the capability and manufacturing base to produce a similar product but one country has lower production costs, tariffs can be used to level the playing field. This allows the higher-cost country to protect its market share from lower-cost imports. These tariffs aim to encourage manufacturers to increase domestic production. This boost’s local employment, which in turn strengthens the tax base and gross domestic product.
How Are Tariffs Used as a Negotiating Tactic?
When a country or region produces a unique product—such as coffee, which depends on climate or natural resources—tariffs can serve as a negotiating tool to balance trade. If a coffee-producing country places a tariff on an imported product, the country that exports that product may perceive the action as unfair and impose a tariff on coffee in response. The goal is to create some balance in trade relations.
What Impact Can Tariffs Have on Consumers?
This is where things get complicated. As mentioned, tariffs are paid to the government by the importer, increasing the cost basis of the item. For simple goods like bananas, which are consumed directly, the impact on the consumer depends on the importer’s cost basis, adjustments to profit margins, and any further markups by distributors and retailers.
If the bananas are purchased by a bakery or restaurant to make a dessert, the impact can be amplified. This ultimately reflects in the final product’s price.
In cases where a product is a component of another assembly, the cost impact can multiply. Take, for example, a vehicle transmission. If some of its components are manufactured abroad and subject to a tariff, the cost of the parts and the assembled transmission will increase. Say the assembled transmission is then exported to another country with tariffs on that class of product, the cost rises again. If the completed vehicle is later imported into a country with tariffs on fully assembled vehicles, the importer must pay an additional fee. The importer may then pass some or all of these costs onto distribution channels and, ultimately, the consumer.
