Tariffs

A tariff (or a duty) is a tax that the government places on foreign imports.

Although the government might levy a tariff for the simple purpose of raising more revenue, usually the official justification for a new tariff (or a hike in an existing tariff) is that it will help domestic producers of the imported good.

The problem with this can be explained on an example. Let’s say that Japanese are capable of making 1,000 sedans for $10,000, but U.S. producers make only 900 sedans for $10,000. Thus the U.S. producers make the appropriate amount of cars and the rest comes from Japanese producers. But the government lobbyists decide that if the federal government imposes a 10% duty on Japanese imports, American producers will profitably expand their operations and provide more jobs for U.S. workers. The government therefore puts a 10% tariff on Japanese sedans. This means that Japanese sedans will cost the U.S. consumers $11,000, out of which $10,000 goes to the Japanese and $1,000 to the U.S. government in form of tariff revenue. They give the $1,000 to the U.S. producers so they can make more sedans. However, since the U.S. consumers are now being forced to pay $11,000 for Japanese sedans, the U.S. producers raise their own prices too. Turns out the lobbyists “were right”. At the higher price, U.S. producers move along their supply curve and manufacture more cars in the American plants by American workers. Is the new tariff an economic success? Most economists would say no. It is true that workers and shareholders in the U.S. car industry benefit from the new tariff, but it’s also true that U.S. car consumers are hurt by it. After all, Americans who wanted to buy a car could get one for $10,000 before, but now they have to pay $11,000 – they are clearly worse off because of this change. Even the consumers who faithfully “buy American” are hurt, because American car prices have one up as well.

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