Explaining Tariffs
If you’ve taken any interest in foreign financial policy and international trade, the term tariff may have come across your radar. Now most people that have studied history may recognize the term because of the Boston Tea Party. The Tea Party occurred because of tariffs, you know, taxes on tea. But, how does the tariff system work today? What does it involve?
There are two definitions for a tariff that are used today. One involves our traditional perception, which is that of a tax levied on goods that are traveling between places. The other is actually a list of rates or prices. For example, when you go onto a hotel’s website and see the different prices for different kinds of rooms (one queen bed, two queen beds, two double beds, whatever), that’s a tariff. Today we’re going to look at the first definition, but I wanted to let you know that there was another one in case you ever saw the word in that context.
Tariffs are levied in order to protect the economy in the country that the goods are being imported to. I bet you’re thinking, “Wait, so it’s not for the government to get more money?” Well, maybe. But it’s more about protection. Let’s use tea as an example since I already mentioned it.
Say that I’m a tea maker in the US, and I can produce a box of tea for 34 cents. I then sell my box of tea for one dollar. There’s a tea maker that is in some South American country, say Venezuela (I have no idea if they make tea, I’m just throwing stuff out there) that can make that same box of tea for a quarter. If they were to import their tea into the United States without the tariff, they could sell that box of tea for 90 cents and end up hurting my tea-making business. So, the government may put a ten-cent tariff on each box of tea they import, forcing the importer to sell their tea for about the same price as my tea. Make sense?
The most recent tariff imposed in the United States was the 2002 U.S. steel tariff, put into place by former President Bush. Dozens of steel industries in the United States had gone bankrupt, and it was perceived that this was due to other countries being able to import steel at a much lower cost. The tariff caused a lot of controversy (some countries had to pay as much as a 30% tariff!), and even though it was supposed to be in effect until 2005, it was lifted in late 2003.
So, there’s a fine balance that needs to be made. The World Trade Organization (WTO) was created so that tariffs would be fair and to protect both the importers and the exporters of international goods. Even though equality is their goal, profitability for everyone is at the top of their list of concerns. They deal with most of the tariff system and fair trade organizations now.
So, now you have a bit more of an idea of tariffs and why they’re in place, and how they affect prices of imported goods. Until tomorrow, spend smart, save smart!
