What are tariffs and how do they impact consumers?

What are tariffs and how do they impact consumers?

A tariff is a tax on imported goods that's paid by the importing firm to its government. However, those costs often get passed down to consumers, resulting in higher prices for the affected products.

Here's Experian's guide to what you need to know about how tariffs work and how they may affect your wallet.

How Do Tariffs Work?

When a country imposes a tariff, any affected goods imported into that country will be taxed. The domestic company importing the product pays the tax to the federal government.

The federal government may set a tariff on specific items imported from one or more countries, or it may create a blanket tariff that affects all imported goods from specific countries.

Tariffs are typically set as a percentage of the price of the goods imported.

Example: If a U.S. company imports $100 worth of apples from a country with a 10% tariff, the company will need to pay a $10 tax to the U.S. federal government.

Who Pays for Tariffs?

While the corporations and manufacturers that import tariffed goods are directly responsible for paying the tax, they often pass the cost onto consumers, resulting in higher prices.

Example: A 25% tariff on an imported automobile worth $30,000 could result in a new price tag of $37,500.

Not all businesses increase their prices to cover the cost of tariffs, however. Instead, they may choose to cut jobs, reduce or pause import shipments or negotiate lower prices from their foreign suppliers.

How Tariffs Can Raise Prices

Tariffs are effectively a cost of doing business for importers. But like other costs associated with manufacturing and selling goods, that cost is usually incorporated into the price you pay as a consumer.

In some cases, the tariff is applied directly to the end product. Examples include:

• Beef
• Cheese
• Chocolate
• Coffee
• Fruit
• Liquor
• Nuts
• Rice
• Seafood

In this instance, the tariff applies to the full cost of the item imported. In other cases, the tariff may apply to certain components used in manufacturing, such as:

• Aluminum
• Copper
• Lumber
• Minerals
• Semiconductors
• Steel

In these cases, the price increase on the end product may not be as drastic, especially if the majority of the final product was sourced domestically.

Recent Price Increase Example: Auto Loans

Consumer prices have already been rising over the past few years, fueled by pandemic-era inflation that rocked economies around the world. While inflation numbers have trended downward since their peak in June 2022, new tariffs threaten to reverse that course.

To give you an idea of how prices have risen in recent years in one area, here's a look at the average auto loan debt according to Experian data from the third quarter (Q3) of each year.

In step with total loan amounts increasing, average auto loan payments rose 5.1% to $662 per month from 2023 to 2024:

Are Tariffs Good or Bad for the Economy?

Historically, tariffs were often a primary source of revenue for the federal government. However, since the late 19th century, they've often been used to:

• Protect domestic manufacturers: Tariffs can reduce foreign competition, driving demand for goods produced domestically. This, in turn, allows those manufacturers to grow, further increasing domestic production.
• Negotiate trade agreements: Tariffs create additional pressure that can be used to gain an advantage in negotiations with trade partners.
• Advance foreign policy objectives: A country may use tariffs to further unrelated foreign policy goals, such as reducing illegal immigration or combating drug trade.

That said, studies provide overwhelming evidence that tariffs can stunt economic growth, which can have an indirect impact on consumers. Here are some examples of how tariffs can impact the economy:

• Higher prices: As previously mentioned, tariffs are often passed on to the consumer. The more tariffs a country imposes, the harder it is for its citizens to avoid higher costs on everyday items.
• Reduced consumer spending: As prices rise, many consumers may be forced to cut back on spending. Reduced consumer spending generally hampers economic growth.
• Job losses: Industries that rely heavily on imported goods, such as auto manufacturing, may be forced to lay off workers to compensate for rising costs and lower sales due to reduced consumer spending.
• Impact on small business owners: Small businesses make up 99.9% of all U.S. companies and create roughly two-thirds of all jobs, according to the U.S. Chamber of Commerce. Unlike large corporations, though, they don't have the same negotiating power with foreign suppliers. As a result, small business owners and their employees will likely be hit the hardest.
• Retaliation: When a country sets a tariff that targets a specific trade partner, the latter may impose a tariff on goods and services exported by the former in retaliation. These retaliatory tariffs can hurt domestic exporting companies and also result in further escalation between the two countries.
• Lower investor confidence: Due to the impact tariffs can have on businesses and consumers, they often undermine investor confidence, resulting in lower stock prices. This can negatively affect anyone who has money in the market, particularly those who are nearing retirement.

How to Protect Your Money From Tariffs

In a trade war, it can be impossible to completely avoid the cost of tariffs. However, there are some steps you can take to shore up your finances amid economic uncertainty. Here are just a handful of tips:

• Build an emergency fund. An emergency fund can be helpful in a one-time financial emergency or if you're experiencing higher costs or reduced income in the long run. Experts recommend keeping three to six months' worth of expenses in your rainy-day fund, but any buffer is better than nothing.
• Pay down debt. Debt payments can put a strain on your budget, especially during challenging economic times. If possible, look for ways to accelerate your debt repayment through strategies like the debt snowball or avalanche method, debt consolidation or a debt management plan.
• Limit new credit. Taking on new debt can give you less flexibility with your budget, especially if it's a large loan. If you're uncertain about the state of the economy and your own personal finances, it may be best to avoid unnecessary debt.
• Cut expenses. Take a look at your budget to find areas where you can cut back. Start with your discretionary spending, such as eating out, entertainment and luxuries. Then, consider looking for ways to reduce your necessary expenses, such as buying generic groceries, negotiating utilities, saving on auto insurance and downsizing.
• Think twice before big purchases. If you're planning a sizable purchase, such as a car or a major appliance, take some extra time to consider whether now is the right time. You may also consider cheaper alternatives, which may provide the same benefits at a lower cost.
• Shop sales. Check for local sales and coupons before heading out to spend money on groceries, clothing, household goods and other necessities.

The Bottom Line

While tariffs can be used to raise revenue for the federal government, support domestic manufacturers and negotiate trade agreements, their impact can be significant for the businesses and consumers affected by increased costs.

Understanding how tariffs work can help you identify areas of your budget that may be impacted, so you can take steps to protect your finances as much as possible.

This story was produced by Experian and reviewed and distributed by Stacker.