An ag economist provides clarity on what tariffs are and the potential challenges tariffs can bring
With President Trump prepared to impose tariffs of up to 25 percent on Canada and Mexico beginning Feb. 1, people have likely seen the word “tariff” pop up multiple times online or on newscasts.
To help clear up any confusion about tariffs, Farms.com connected with George Frisvold, an ag economist at the University of Arizona.
Farms.com: What is a tariff?
George Frisvold (GV): A tariff is a tax. The way to think of it is like a sales tax on imported items.
Farms.com: Why do countries use tariffs?
GV: For different reasons. The classic one is protecting certain industries from foreign competition. Another reason governments use tariffs is because it’s a tax, to increase government revenue. Tariffs can also be used as part of strategic trade policy, like punishing a country for dumping, which is selling something on the world market for below production costs. They can also be used as a threat to get countries to change non-trade policies.
Farms.com: Who pays the tariff?
GV: The importing company pays the tax directly. Then they pass it along in varying degrees to the people who buy the product next.
Farms.com: Are there only import tariffs or are there examples of exporters paying tariffs too?
GV: Exporters can pay indirectly if there’s retaliation. If the U.S. imposes tariffs on items coming in, another country can put import controls on U.S. exports, so the exporters end up indirectly paying through this retaliation. We saw this during the first Trump administration and farmers lost a lot of revenue.
George Frisvold
Farms.com: How do tariffs affect consumers?
GV: Consumers and buyers pay a higher price for the imported good, and the total quantity of what’s available from foreign markets goes down. For ag producers, this means the cost of imported fertilizers and imported chemicals and imported farm machinery and imported feeder cattle would go up. And now that imports are more expensive, this means domestic sellers can raise their prices. Before they were competing with a world price, now they’re competing with a world price plus a tax. So, the prices of domestically produced goods would go up too.
Farms.com: Who collects the tariff in the U.S.?
GV: The treasury because it’s government revenue.
Farms.com: How is the tariff money used after collection?
GV: In general, it goes into federal funds and Congress appropriates money for different things. Congress could direct that the funds from tariffs be applied to something specific, but they often don’t do that.
Farms.com: How are tariffs generally calculated?
GV: The same way a sales tax would be calculated on a restaurant bill. This one is just applied at the border.
Farms.com: President Trump has committed to a 25 percent tariff on goods from Canada and Mexico. How much could that increase costs for an importer on shipments of ag products?
GV: The simple answer is up to 25 percent. If there’s good and abundant U.S. substitutes, it’ll be something less than that. But when you think of the stuff we import, like coffee, or bananas, there aren’t substitutes. So, for a lot of ag products, the tax can make the prices of things go up by 25 percent, and consumers pay that.
Farms.com: How does a country benefit from collecting tariffs?
GV: It’s revenue for the government, so the government has money to spend. Import tariffs are a small portion of U.S. government revenue compared to income tax. Tariffs can also act as a federal jobs program in protected industries because there’s more domestic production and employment than there otherwise would be.
Farms.com: What are some challenges the U.S. could face because of tariffs?
GV: The cost of imported and domestic products are going to be higher, and that makes the U.S. less competitive on the world market. For U.S. agriculture, we’re net exporters on a lot of things, and the cost of trade retaliation could be high for the U.S. farmer.