As the 47th President of the United States prepares to enter the White House, tariffs are again making headlines. This time, they are central to the administration’s proposed economic strategy. But what exactly are tariffs, how do they work, and who determines their implementation? The answers lie at the intersection of domestic policy, global trade, and international diplomacy.
What Are Tariffs and How Do They Work?
A tariff is essentially a tax imposed on imported or exported goods. Governments use tariffs to regulate trade, protect domestic industries, or generate revenue. When a tariff is applied, the cost of imported goods increases, which can make domestic products more competitive in price.
Tariffs come in various forms. Ad valorem tariffs are calculated as a percentage of the value of the goods being imported, while specific tariffs are fixed fees charged per unit of a good. A compound tariff combines these two approaches.
While tariffs can encourage consumers to buy locally made products, they also risk raising prices for consumers. Companies importing goods often pass these added costs onto their customers, which is why tariffs are often described as a “hidden tax” on the public.
Who Determines Tariffs?
In the United States, tariff policy is largely shaped by the federal government, particularly the executive branch. The President has significant authority to impose tariffs under laws like the Trade Expansion Act of 1962 and the Trade Act of 1974, which allow for tariffs in cases of national security concerns or unfair trade practices. Additionally, Congress can influence tariff policy through legislation and oversight.
Internationally, tariffs are subject to agreements negotiated by bodies like the World Trade Organization (WTO), which seeks to reduce trade barriers among member countries. However, unilateral tariff actions, such as those proposed by the incoming administration, often fall outside these agreements, leading to tension among trading partners.
The Impact of Trump’s Proposed Tariffs
According to Michael A. Scarpati, CEO of RetireUS, the administration’s proposed tariffs could have widespread consequences. “Trump’s proposed tariff policy is likely to have significant ripple effects across consumers, the economy, and international relations,” Scarpati explains.
Domestic Impact: Higher Prices for Consumers
The tariffs under discussion include a 25% levy on goods imported from Canada and Mexico and an additional 10% on products from China. These measures are expected to raise the cost of everyday goods, from groceries to electronics.
“Price elasticity will play a major role in determining how much of the increased costs are passed to consumers,” Scarpati says. “There’s only so much consumers are willing or able to pay before demand drops off, and with recent inflation, there’s little room left for further price increases.”
For businesses, the stakes are equally high. Companies must decide whether to absorb the increased costs, risking slimmer profit margins, or pass them on to consumers, potentially reducing sales and demand.
Global Implications: Escalating Trade Wars
On the international stage, the proposed tariffs are expected to strain relations with key allies and trading partners. Scarpati warns of potential retaliatory measures: “The international consequences of this tariff policy risk escalating trade wars, straining relations with key allies like Canada and Mexico, and intensifying tensions with China.”
Retaliatory tariffs by other nations could disrupt global supply chains, further driving up costs for businesses and consumers alike. This scenario would exacerbate economic uncertainty, both domestically and globally.
Strategic Negotiation or Economic Strain?
While the immediate outlook may seem grim, Scarpati suggests that the administration’s approach may have a strategic aim. “We can’t lose sight of Trump’s background as a dealmaker,” he says. “These steep tariff proposals are likely being used as leverage to bring countries to the negotiating table and secure more favorable trade terms.”
The strategy could yield long-term benefits, such as revised trade agreements addressing imbalances and protecting domestic industries. However, the process is fraught with risk, including market volatility and economic strain.
The Nation Waits
As the nation braces for the new administration’s policies, the debate over tariffs underscores a broader tension in U.S. trade policy. On one hand, tariffs can protect domestic industries and jobs. On the other, they risk higher consumer prices, strained international relationships, and economic uncertainty.
Ultimately, the effectiveness of tariffs depends on their implementation and the broader strategy behind them. For now, businesses, consumers, and global markets must prepare for potential upheaval as the proposed policies take shape. Whether the endgame justifies the means remains to be seen.
As Scarpati puts it, “For now, the global market should brace for potential volatility as these policies take shape.” For Americans and the world alike, the coming months will reveal whether tariffs will deliver economic transformation—or unintended consequences.