What is a tariff & will Trump’s proposed tariffs affect my money?



Myles Ma

Myles Ma

Senior Reporter

Myles Ma is a senior reporter at Policygenius, where he covers personal finance and insurance and writes the Easy Money newsletter. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

Published April 12, 2018 | 4 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

Featured Image What is a tariff & will Trump’s proposed tariffs affect my money?

The Trump administration's list of Chinese imports it wants to tax contains more than 1,300 items and covers 14 pages. Many imports are subject to taxes, but President Donald Trump wants to slap an additional 25% tariff on these items to retaliate for what his administration calls "unreasonable or discriminatory" trade practices.

The list includes things like malaria diagnostic test kits, dental cements, steel, aluminum, turbines, engines, medical sterilizers, dishwashers, bulldozers, buckets, copy machines, sewing machines, chain saws, concrete mixers, ball bearings, airplane rotors, batteries, video projectors, camera lenses, circuit breakers, flight data recorders, motorcycles, tug boats, seismographs, catheters, X-ray tubes, microscopes and rocket launchers.

All these things and more will get pricier if tariffs come to pass. Here's how that might affect your money.

What is a tariff anyway?

A tariff is a tax on imports. They normally don't make news. Lots of governments tariff lots of things. But occasionally politicians use them to try to punish other countries.

In the case of the proposed tariffs on foreign steel and aluminium and hundreds of products from China, Trump has said he wants to protect American manufacturing and make American companies more competitive in China. A tariff on foreign steel raises the price of foreign steel, which makes American steel more competitive. American steel producers will be able to charge higher prices and make more profit as a result, said Michael Hicks, director of the Center for Business and Economic Research at Ball State University.

These price hikes can trickle down to regular consumers, who will pay more for aluminum siding or aluminum window frames. American steel and aluminum producers will have more money, so they may hire more people or they may not. People who buy steel and aluminum, no matter where it comes from, will pay more.

What happened the last time America did this?

Former President George W. Bush imposed tariffs on steel products in March 2002 to help domestic steel producers. The tariffs ranged from 8% to 30%. A study by Trade Partnership Worldwide, a consulting group, found the resulting higher steel prices cost 200,000 Americans their jobs, representing $4 billion in lost wages. The tariffs raised costs for American manufacturers who purchased steel. They had to raise prices as result, which cost them customers and eventually led to job cuts.

Those tariffs, however, didn't spark a trade war — when a country that is the subject of new tariffs starts raising taxes on imports from the instigating country.

The last good example of a real trade war is from the 1930s, Hicks said. Many countries raised tariffs during the Great Depression. They didn't help.

"It literally cost us three more years of the Great Depression," Hicks said.

Wait, why is this allowed?

Tariffs are a tax. I know what you're thinking: Doesn't the Constitution say only Congress has the power to lay and collect taxes? That's correct, you little constitutional scholar.

But Congress gave the president power to impose trade sanctions and raise tariffs on countries that violate trade agreements or engage in unfair trade practices.

Why economists hate tariffs

There are three main reasons. One, tariffs involve the government picking winners and losers, when economists prefer the market to do so. Two, they're a tax, which is fine, but they're a really, really high tax. Three, they almost always provoke a reaction.

Picking winners & losers

Most taxes don't discriminate among products. A sales tax is the same whether you buy diapers or pencils. The goal of the tax system, whether on sales, income or consumption, isn't to pick winners and losers.

"We let people make the decisions about what and where and how much they consume," Hicks said.

Tariffs are in opposition to that approach, Hicks said.

They're really high

The tax rates proposed by the Trump administration was 25%, including on Chinese-made cars.

"What that is intended to do is not to raise revenue to provide schools or provide a military or police department or build bridges or roads, it's designed to price those cars out of the U.S. market," Hicks said.

Because of that, the beneficiaries aren't the population at large, but specific U.S. manufacturers.

Other countries hate it

Other countries don't just sit back and take it when the U.S. imposes tariffs. Take China: Officials there have already announced tariffs on their own list of American-made goods. China's list includes soy. American farmers count China as the biggest export market for soy, so their wallets could take a hit if Chinese customers take their business elsewhere.

In other words, Trump's tariffs are intended to help the American steel industry ... but they'll cost its soy bean suppliers.

"The way this always manifests is one side picks winners and losers and the other side picks winners and losers," Hicks said.

The biggest losers end up being exporters in both countries and consumers stuck with higher prices, he said.

Speaking of taxes, they're due soon. Here's a guide to filing a last-minute tax return.

Image: tcly