But Why Tariffs? | Cash Course | PragerU

We've all made a trade between friends. I'll trade you one Uncle Sam card for two bags of peanuts. Deal. But when it comes to trade between countries, hold on. Where's our guarantee peanuts? I say there's no deal. Oh, what are you talking about? There's no deal. You get at least two of those cars for two packs here. She could be allergic to peanuts. Oh, what are you, a peanut salesman? That can get complicated. International trade is a huge part of the global economy. But all sorts of rules, regulations, and trade agreements affect what countries can and cannot trade or how much of something they can trade. When political or diplomatic relations between countries deteriorate, or when a country's leaders or citizens make certain demands, trade conflicts can arise and lead to trade barriers. One kind of barrier is called a tariff. This is simply a tax on goods sold or purchased in another country. It's an amount or percentage of the value of that good and it's collected by the government. Tariffs or duties have been around for a long time. They were common in ancient Greece and the Roman Empire. Great Britain used tariffs to control trade in America's 13 colonies. Those tariffs made imported items like tea and textiles more expensive for the colonists which led to well some explosive events. Even after the American Revolution, tariffs have played an on andoff role in our country's history. Before there was an income tax, tariffs were a way to fund the government. The United States has seen periods of high tariffs and low tariffs, each reflecting global events, changes in domestic production, or the policies of the government at the time. For the past few decades, the US has charged very low tariffs or no tariffs for most goods being imported to keep prices low for its citizens, as Americans import a lot of what they consume. Other countries have charged high import tariffs for US goods because they didn't want their citizens buying US goods as much as their own domestically produced goods. Many of America's foes and friends have seen tariffs go up and down over the years. Let's take a look at how tariffs work. Say a store owner in the United States sells chocolate from Switzerland. If the US government puts a tax on that chocolate, then that store owner pays an import tariff. a tax collected on goods brought in from another country. When people say tariffs, they usually mean import tariffs. So, how is a tariff calculated? The first way is setting a fixed dollar amount per item, which is called a specific tariff. A specific tariff might be 17 on every box of imported chocolate, or $750 on every car imported from Japan. If a dealership orders 10 cars from Japan, that means they're on the hook for $7,500 in tariffs. Tariffs can also be calculated at Valorum as a percentage of the goods price or value. If someone imports a computer costing $1,000 with a 7% tariff, they'll have to pay $70 in taxes. Well, at least I can export this fine American chocolate without worry. There are also export tariffs. That's a tax placed on items like your American chocolate that are exported to other countries. Oh, come on. Why? Tariffs have several intended purposes. One of them is trying to raise revenue to help a country's government balance the budget and fund various services. Import tariffs are also used to protect domestic producers by raising the cost of imported goods. This incentivizes consumers to buy domestic brands of those same goods instead. Sometimes import tariffs are also attempts to protect consumers. If a government thinks that a foreign produced toy or food product doesn't meet a certain safety standard, tariffs can discourage people from buying it. Export tariffs, on the other hand, can discourage exports of a product and protect domestic consumers by ensuring supply. Finally, tariffs are often used as a tool for foreign policy. When the relationship between two countries deteriorates, tariffs can be used as a weapon or punishment, a way to make trade more costly. Wait, I just want to buy chocolate. What do tariffs have to do with me? Like all economic decisions, tariffs affect everyone. For one, tariffs often make it harder and more expensive for retailers to sell an imported good since most of the increased cost of the good is passed on to the consumer with higher prices. In addition, if a country is dependent on another country for specific imported goods and has no real domestic alternatives, it could cause shortages and a spike in prices until other sources can be found. Tariffs can also harm consumers by reducing competition. If a domestic business doesn't have to compete with cheaper imports, it won't be pushed as hard to keep up with new and improved products. This disincentivizes businesses from being efficient, which often results in a nation's scarce resources being wasted and customers facing higher prices and inferior product quality. Lastly, tariffs imposed to punish another country might result in retaliatory tariffs. If both sides keep raising taxes on each other's goods, trade between countries could grind to a halt, resulting in fewer goods and higher prices for consumers. Tariffs on me? How about I slap a tariff on you? A tariff? You know what? Two can play this game. How about one and two? You like that? Well, how about I get you the mother of all tariffs if I can? Oh, no. There's nothing new about the use of tariffs in trade, but there's also nothing new about their consequences. Tariffs are a tool governments use to try to protect domestic industries or achieve foreign policy goals, but they come with significant tradeoffs, no pun intended. Make sure you understand not just their effect on your nation, but how they might affect the price of your favorite Swiss chocolate, German car, British tea, Chinese soy sauce. Here comes a tariff to end all tariffs. Hey, well, how about this? A nice tariff sandwich right on your forehead. Don't you do that to me. Watch more at prageruids.com. And parents, don't forget to subscribe.