I understand that at the end of the day consumers pay for tariffs, but where does the money from those tariffs go?

Question

I understand that at the end of the day consumers pay for tariffs, but where does the money from those tariffs go?

In: Economics

Answer 1

A tariff is a tax by the government on the goods that are imported. Like any tax, it goes into the government’s treasury.

The companies who import the goods pay the tax. Since these people are usually importing goods for resale, they are likely to pass the cost of the tariffs along to consumers in the form of higher prices (instead of letting it eat into the company’s profits).

The idea behind tariffs is to discourage domestic companies from importing products and parts from foreign countries by making it more expensive to do so. The hope is that those companies will buy those products and parts domestically.

The problem with that theory is the world doesn’t really work that way anymore.

For example, a 100 years ago you could only get tomatoes during the summer because that’s the season they grew in. You were limited to what grew locally and in season. Shipping & refrigeration technology didn’t allow you to move tomatoes hundreds or thousands of miles. Today you have dozens of varieties of tomatoes year round because even when it’s not tomato season in the US, it is somewhere else in the world and you can get your tomatoes imported.

Adding tariffs to imports, though, doesn’t change that. Tomatoes won’t suddenly grown in the winter because of tariffs. So you’ll either pay more for your year-round tomatoes or not have them at all, because the domestic options *cannot* meet the demand.

The same is true for non-agricultural industries. The US imports 3-4 times the amount of steel that it produces. Even if the domestic steel industry *wanted* to, they don’t currently have the capacity to provide for the demand and (assuming the necessary raw ore deposits aren’t tapped out or prohibitively expensive to mine) it would takes us years to ramp domestic steel production up to levels to meet US demand. Meanwhile, prices go up because of tariffs.

The world is too interconnected for trade isolationism to be an effective diplomatic cudgel in the 21st century.