Let’s talk about tariffs…

We’ve heard about them on the news and if you have an online business then tariffs are a scary thing to worry about.

Our community of Amazon sellers were all worried when they found out the United States was planning to raise taxes on Chinese imports.

But a large number of people in our community were confused about tariffs, how they worked and wanted to know if they needed to be concerned.

That’s why in this article we’re covering tariffs and everything that’s connected with running an online business.

Let’s start by defining what a tariff is:

What is a Tariff?

Simply put, a tariff is a tax. It’s a tax that a government places on goods and services that are imported from other countries. The purpose of the tax is to increase the price of the goods and services to give domestic suppliers an opportunity to compete.

Tariffs are meant to do two things:

  1. Make it less desirable for domestic businesses to outsource and move their businesses overseas because it would be more expensive.
  2. Convince domestic buyers to purchase goods and services domestically because the imported products are more expensive.

Tariffs are strategically used by governments to restrict trade between a particular country to speed along trade negotiations. The goal of the government is to make the added cost of the product or service too high for domestic consumers and hurt the importers business.

How Does a Tariff Work?

Tariffs are a consumption tax that the government levies (applies) on foreign goods. The tax is a small percentage of the total cost of the product. Another name for tariffs are import duties. Only congress is allowed to approve or repeal a tariff.

Tariffs work by raising prices on a product. And those prices are supposed to protect a nation’s domestic industry.

But they cause a divide between countries. On a long enough timeline every country involved in a tariff battle loses business because the citizens stop trading for fear of increased taxes.

You’ll see a different tariff rate depending on the industry and governments charge sales taxes, local taxes, and customs fees. Which they collect at the ports upon arrival.

What is the Point of a Tariff?

Regardless of whether you believe a tariff is good or bad, the intended point is to raise the cost of international goods or services to make domestic goods and services competitive.

Economists argue for both sides of this policy but as long as long as labor costs around the world stay lower than the U.S. there will always be a threat to US producers and tariffs will be used as a political tool. And other countries can retaliate and place a tariff on their goods.

A Time Before Income Taxes

Before 1913, tariffs were the most common way for the United States government to generate revenue. Which made sense, as a country you want the citizens producing and being productive while disincentivizing the purchase imported goods.

That’s why before the introduction of the income tax, almost 95% of the US Federal Government revenue came from import tariffs. It could be up to 20% of the cost of a product. You can make certain arguments about the income tax but typically you wouldn’t want to tax your productive citizens income. Now we have both, a tariff system and income tax, and that’s causing a strain on the American taxpayer.

Wrapping This Up…

There’s no way around it. Tariffs are taxes and they’re directly paid by the consumers. This is because importers will raise the prices of their products to offset importing tariffs. Most people are unaware of why the prices of their favorite products goes up.

The truth is that if the domestic products were better quality then domestic consumers would switch, but it’s usually not the case. They are used to “protect” domestic businesses but end up costing domestic consumers.

Tariffs can and are used as political weapons by every country not subject to free trade agreements. But these arguments are not all black and white. When free trade agreements are enacted, just like tariffs, there are unintended consequences happen.

For example, in the United States manufacturing cities were completely abandoned under the free trade agreement because labor prices in developing countries were undercutting US labor costs. So companies packed everything up and shipped it overseas.

There’s a delicate balance of powers at play here and it’s important to understand as a business owner in the 21st century.

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