The Effects of Tariffs on the United States
The United States (US) has been involved with tariffs since it declared independence from Great Britain in 1776. Perhaps one of the most well-known tariff acts occurred in 1789, written by Alexander Hamilton. Hamilton believed that passing the tariff act of 1789 would force Americans to produce domestic goods, promote competition and eventually begin to export items, (Malloy). The US has come a long way since its first tariff act, but the ideas that motivated the founding fathers are still used today. This essay will discuss the several different types of tariffs, as well as, different strategies for using them. Both topics will be used to analyze the pros and cons of continued tariff use in the United States.
There are two different types of tariffs that are used; the first is specific tariffs. Specific tariffs set a fixed fee on every item imported (Radcliffe 2015). For example, a law could state that every pair of shoes being imported from Italy will have a $15 fee. Therefore, if a pair of shoes that is worth $200 will now be marked up to $215. The second type of tariff is called a value tariff, or ad valorem. This tariff uses a fixed percentage rather than dollar amount (Radcliffe 2015). Using the shoe example, let’s replace the $15 tariff with 15% on every pair of shoes imported. This would mean that shoes of a $200 value would now be marked up to $230. This is called the value tariff because as the price of an item increases, so does the amount of the tariff. Both types of tariffs are effective when used properly. Using a specific tariff is useful for items with low price variability. For example, mangoes imported from the Philippines, no matter which company they are being imported from, will generally be the same price per mango. Therefore, using a specific tariff on all mangoes being imported from the Philippines would be most useful. However, items with a higher value and higher price variability, will typically use the ad valorem tariff. Analyzing two different Volkswagen cars, the Beetle and the Touareg; the starting price for a 2017 Beetle is $20,000 and $50,000 for a Touareg. If the US decided to place a 15% tariff on all vehicles imported by Volkswagen, then the mark up prices would be $23,000 and $57,500, respectively. The price difference between these two value tariffs is $4,500 which is quite significant. Therefore, it is important to properly use these tariffs to be able to employ an effective strategy.
There are several different reasons that the US would decide to use tariffs, however, only two of them will be discussed in this essay. The first one is the threaten of domestic industries due to competition of imported goods (Radcliffe 2015). Companies in third world countries have the advantage of using cheap labor to lower the cost of production. These companies then sell their products to first world countries, such as the US, to make a higher profit margin than they would if they sold the product in their own country. Therefore, tariffs are used to inhibit these companies from importing their goods and threatening US domestic industry. In addition to protecting domestic industry, tariffs are also used to protect consumers. Investopedia states that, “A government may levy a tariff on products that it feels could endanger its population,”. This is best explained with an example. Suppose to keep costs low, a Chinese toy company uses lead paint on children’s toys because it is a cheaper alternative to latex paint, (Lipton & Barboza 2007). If the company exports these toys to the US, and the US finds out that the toys are made with highly toxic, death inducing paint, they might place a tariff on all toys imported from China. This technique would cause the Chinese government to begin to regulate the safety of children’s toys prior to exporting them. Eventually, the US could lift the tariff if they see that the Chinese government is fixing the issue. If used correctly, tariffs can be used to protect a country from harm of other countries. However, even though tariffs can be used to help the US, it is important to analyze the effects of using them.
Analyzing the pros and cons of levying a tariff is an effective use of the them. As previously stated, tariffs can provide protection to the United States. It can protect the domestic industries and the consumer’s safety. Additionally, it will increase tax revenue for the US. The more manufacturing that is preformed domestically, the more sales will increase. Sales creates taxes which creates more cash flow to the US federal and state governments. The increase in manufacturing will also create more jobs for Americans which will once again create more sales to other companies in the US ultimately sending more tax revenue to the US government. There are many positive effects of using tariffs, but of course, there are also negative effects. As stated previously, companies in third world countries can manufacture products much cheaper than the US can. If goods are being manufactured in the US because of high tariff costs, then the cost of the products will increase as a result. Additionally, the increase in product cost will cause an increase in the cost of living in the US. Some families might not be able to afford this increase. Another negative effect of tariffs is the smaller variety of goods. In the US, there is currently a large variety of items available for sale. Take laptop sleeves for example, one could purchase a laptop sleeve made in the US, which would be very expensive but of good quality. Another laptop sleeve made in India is sold for a cheaper price but is of lesser quality. Depending on the consumer, purchasing the cheaper laptop sleeve might be effective and efficient for them. Though the cons are undesirable, they do not outweigh the positive effects of using tariffs.
After analyzing the types, the uses, and the effects of tariffs, one can see the promising results of using them. Using either specific or value tariffs, the US can create more jobs, more tax revenue and protect the consumers. Though tariffs can have a negative cost effect it will have promising results in the long term.
Lipton, Eric S., and David Barboza. “As More Toys Are Recalled, Trails End in China.” The New York Times., 19 June 2007. Web. 16 Nov. 2016. < http://www.nytimes.com/2007/06/19/business/worldbusiness/19toys.html >
Malloy, Michael P. “Tariff Act of 1789.” Encyclopedia.com. N.p., n.d. Web. 16 Nov. 2016.
Radcliffe, Brent. “The Basics of Tariffs and Trade Barriers.” Investopedia. N.p., 28 Dec. 2015. Web. 16 Nov. 2016. < http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp >