Tariffs are a surcharge on imports added and demanded by the government, paid by the people or entities importing.
As an example, if an American buys a Chinese coffee maker priced at $100 and there is a 50% tariff, there is a $50 tariff that is paid by the importing American to the American government.
The total cost to the importing American is $150. Now, if this price is equal to or higher than an American coffee maker then the importing American is incentivized to purchase the American coffee maker instead.
As another example, if Tesla sells Model 3s for $50,000 and BYD comes in with a similar spec car priced at $25,000, then putting a 100% tariff on it will drive BYD's effective price up to $50,000 allowing Tesla to compete without undercutting or outright selling at a loss.
Essentially, tariffs are a way to ensure that the pricing floor of the domestic market is not driven down unreasonably by international markets at the cost of the importers.
EDIT: Fixed some math. :V
> As another example, if Tesla sells Model 3s for $50,000 and BYD comes in with a similar spec car priced at $25,000, then putting a 100% tariff on it will drive BYD's effective price up to $50,000 allowing Tesla to compete without undercutting or outright selling at a loss.
Doesn't that mean that American will have to pay $50 000 for a car that is worth $25 000? While people in other countries will be able to buy cars cheaper, buy more of them and maybe it somehow improves their life quality.
The purpose is to prop up local companies.
Which is not always a bad idea, having a local supply and innovation of something can be rather important, local money is less "Gone" than foreign money, think of how healthy small towns are when all of the shops are local vs when they are not.
The problem comes when there is no realistic local competition. If you don't make something locally at all, an import tariff is just a stupid tax.
It means exactly that. It also means the American company will feel less pressure to improve cost or quality.
Yes. Tariffs are bad for consumers. The supposed benefit is to manufacturers, since in that scenario Tesla will be able to sell its cars at a higher price and profit.
Right, the coffee maker company in China has some options:
* Figures out how to make it even cheaper (unlikely)
* Figure out how to avoid the tariff legally: Maybe move the manufacture or assembly to Mexico for the US market.
* Claim the product is something else, just enough to avoid the tariff(i.e. claim it's a tea maker, not a coffee maker)
* Stop selling in the US since they won't get any sales
* etc.
Also the other issue: the first thing the American company does is ensure it sells coffee-makers for $149 and not a penny less.
In fact depending on your tarriff regime, this can incentivize a bunch industries to actually raise prices if the new import cost is higher then they would currently sell at.
The incentive to raise prices is pressured down by customers' desire to not spend more money than they have to. If businesses can get away with raising prices that means the price was too low to begin with, tariffs or no tariffs.
That's dependent on the market actually being efficient.
If a consumer walks into a store and sees coffeemakers by ten different brands, but seven are all actually owned by one giant manufacturer and the other three by some American almost-as-giant manufacturer, then a tariff on the former will drive up the price of seven of them and the American manufacturer will almost certainly raise the prices on the remaining three. Otherwise, it's just bad business.
Oops, in "actually owned by one giant manufacturer", I meant to say "actually owned by one giant Chinese manufacturer".