Understanding Tariffs
Dear Dr. Per Cap:
I keep hearing that tariffs are going to cause prices to skyrocket. Why is that, and how can I protect my budget?
Signed,
Cost-Minded
Dear Cost-Minded,
Tariffs are taxes placed on products and goods imported from one country to another. They are a tool for governments to regulate trade and protect their economies.
Here is an example: The U.S. has recently imposed tariffs ranging from 10% to as high as 145% on many goods imported from China. These goods can be common consumer products ranging from aluminum foil, apparel, and toys to tech goods like electronics, lithium-ion batteries, and semiconductors.
Let’s look at aluminum foil, which currently incurs total tariffs of about 75%. When a U.S. store, retailer, or other type of business purchases aluminum foil from a Chinese manufacturer, it must pay 75% of the purchase price to the U.S. government as tariffs.
The business then has several options. It can pass the added cost onto consumers by raising the price of aluminum foil products and hope consumers are willing to pay more. The business can absorb the cost of tariffs by keeping prices the same, but cutting costs in other areas, such as labor or advertising. Or it can just stop importing aluminum foil from China.
Maybe it can buy a similar product from a different manufacturer in another country that is subject to lower tariffs. Or buy aluminum foil from a U.S. manufacturer that is not subject to any import tariffs.
Ultimately, the goal of tariffs is to lower a country’s dependence on foreign goods while increasing its own manufacturing capability.
As budget-conscious consumers, our primary concern is the impact of businesses raising prices to offset tariffs or shortages of products they stop importing. One strategy is to stock up on products that could be impacted by tariffs before price hikes and shortages hit.
Another tip is to think about buying less stuff. I will use myself as an example. When I was a younger adult, I could fit all my clothes in a modest-sized closet and a small chest of drawers. Click ahead to 2025 and I have two closets, two chests, and still not enough space to fit all my shirts, coats, shoes, and other apparel. Like many Americans, I own a lot more clothes, housewares, and gadgets.
Now might be a good time to think about how much stuff you own and how much you really need. Buying less could be your best defense against tariffs.
Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.