Tariffs Explained

On March 4, imports from Canada and Mexico became taxed at 25 percent, with Canadian energy products subjected to 10 percent import duties and Chinese imports taxed at 20 percent.

While the recently imposed tariffs are intended to revive the American manufacturing industry in the long term, economists and media reports project that consumers will see an increase in the price of many imported goods in the short term—from computers and gasoline to clothing, cars, medications, and groceries like avocadoes and bananas.

Business analytics expert Shaya Sheikh, Ph.D., associate professor in the School of Management, explains how the tariffs could impact consumers, businesses, and supply chains.

What purpose do tariffs serve?
In general, tariffs are supposed to protect domestic industries by making imported goods more expensive. This is especially true for industries struggling to compete with cheaper imported products. Tariffs can also serve as leverage for the government to raise revenue. In some cases, governments can use tariffs to reduce trade deficits and encourage consumption of local products.

In general, what are the pros and cons of imposing taxes on foreign goods?
Tariffs can potentially offer some advantages, but they can also result in significant drawbacks. On the positive side, tariffs can generate revenue for governments, incentivize domestic production, or serve as leverage in trade negotiations with countries. However, these benefits are often overshadowed by negative consequences as tariffs can lead to increased prices for consumers and reduced economic output. They also often trigger retaliatory tariffs from other nations and harm exporters. In addition, tariffs can damage international trade relationships and have negative consequences for other countries by making their goods in the global market more expensive and less competitive.

What are the implications of the newly imposed tariffs for the average consumer?
In general, the cost of goods from Mexico, Canada, and China will increase. These increased costs are often passed on to consumers in the form of higher prices for food, clothing, electronics, cars, appliances, etc. In particular, food prices may significantly rise, as Mexico is a primary supplier of fruits and vegetables, while Canada dominates in grain, livestock, and meat exports.

When prices rise due to tariffs, consumers’ purchasing power decreases. This can strain household budgets, especially for lower-income households who spend a larger portion of their income on essential goods. In addition, a significant and continuous downturn in the stock market can affect retirement savings and investment accounts.

Tariffs can also lead to job losses in industries that rely on imported goods or on industries that export goods and face retaliatory tariffs from other countries. If businesses face higher costs for imported components or raw materials or lose export markets, they may end up reducing production or laying off workers.

Should consumers stock up on certain items or make some purchases sooner?
We need to be aware that the current tariffs could be temporary, or the situation could evolve in unexpected ways. If the tariffs stay “as is,” price increases will likely be gradual. Businesses often absorb some initial cost increases or adjust pricing gradually. This is because businesses often have existing inventories purchased before the tariffs went into effect. The full impact of the tariffs will be felt over a longer period.

If you know you will need to purchase certain appliances or electronics in the near future and you are concerned about price increases, making those purchases sooner rather than later could potentially save you money in the long run. The best approach for consumers could be to prioritize purchasing essential items they need rather than stocking up on discretionary items.

How might supply chains be impacted?
Tariffs directly increase the cost of imported goods. For businesses that rely on imports, this immediately raises their input costs. Companies may need to find alternative sources to circumvent tariffs. Companies might need to reroute shipments, find new transportation providers, or deal with delays at borders due to increased inspections or paperwork. Uncertainty around tariffs and trade policy makes inventory management more difficult.

Businesses may need to hold larger safety stocks to buffer against potential supply disruptions or price fluctuations, increasing warehousing and inventory carrying costs. In some cases, companies might consider relocating production facilities to countries outside of tariff zones to maintain cost competitiveness. This is a major supply chain disruption requiring significant investment and time in the original location.

Global supply chains have evolved to be highly efficient and optimized based on factors like cost, specialization, and proximity to markets. Tariffs force businesses to make decisions based on tariff avoidance rather than pure efficiency.

Overall, the newly imposed tariffs will likely create significant disruptions to supply chains by increasing costs, complicating sourcing, and creating uncertainty. These disruptions can lead to higher consumer prices and slower economic growth. The extent and duration of these impacts will depend on how the trade situation evolves.