Explainer: What to know about tariffs, how they are being used, and who is paying for them

While US President Donald Trump imposed a 10% tariff on most US trading partners in April, the rate is set to rise for dozens of economies including the European Union and Japan. Photo / AFP

Since re-entering office, United States President Donald Trump has announced a barrage of tariffs to try to rewire the global economy.

The trade actions have taken effect in fits and starts, resulting in wild swings in markets and fresh tension among some of America’s closest trading partners.

What’s the latest?

Trump this week threatened high tariffs on a wide range of targets.

The President said today that many goods from Canada would be subject to 35% tariffs, in part because of the country’s role in allowing the flow of fentanyl into the US.

It came a day after he announced a plan to impose a 50% tariff on all imports from Brazil.

He suggested that the new levies were partly a response to a “witch hunt” against Brazil’s former president Jair Bolsonaro. A political ally of Trump, Bolsonaro is facing trial for attempting a coup.

President Luiz Inácio Lula da Silva of Brazil said in a statement yesterday that his country would retaliate, and that Brazil “will not accept being abused by anyone”.

Trump also announced plans to impose a 50% tariff on imported copper on August 1 after his advisers submitted a report arguing that protecting copper was important for national security.

The metal is also heavily used by the manufacturing and construction industries, which are likely to pay higher prices for imported copper.

The threats came as part of a wave of announcements this week of potential new import tax rates on goods from more than 20 nations, which Trump said would also take effect August 1.

In many instances, the rates Trump announced were the same as or close to the high levels he threatened to impose in April, when he rolled out punishing levies on nearly 60 US trading partners.

He then abruptly reversed course for 90 days — for every country except China — to give governments time to make deals.

Since then, US officials have been juggling negotiations with trading partners, working to draft agreements before the 90-day deadline.

Two such arrangements have been reached: one with Britain that lowers tariffs on British cars, steel and aluminium, and aerospace equipment; and one with Vietnam.

The agreement with Vietnam imposes a 20% tariff on all imports from the country and a 40% tariff on any “transshipping”. Vietnam was scheduled to face a 46% tariff.

Representatives from Japan, the European Union, Malaysia, South Korea, Indonesia and other governments have also been cycling through Washington in recent weeks to try to find an arrangement that would avert higher tariffs.

Who or what else is facing tariffs?

China: Trump’s trade war has been no more apparent than in America’s relations with China. The world’s two largest economies began to ratchet up import taxes on each other earlier this year, then reached a handshake agreement in June to remove some of the harmful economic measures they had used to target each other.

While details of the truce were not released, the deal called for China to relax restrictions on rare earth metals, critical minerals that are needed for manufacturing cars, robots, wind turbines, jet fighters and other technologies. In return, the US agreed to pull back the limits it had placed on exported products and technology, including ethane and airplane parts, as well as proposed visa restrictions.

While Trump hailed the agreement as progress, it appeared to return the countries to a status quo from several months earlier, before he began singling out China.

Foreign steel and aluminium: In June, tariffs on foreign steel and aluminium doubled to 50%, in a move that Trump said in an executive order would “counter foreign countries” as they “undercut the competitiveness” of American industries.

But the higher tariff rate is likely to raise costs for American businesses that rely on the metals — such as automakers, plane manufacturers homebuilders and oil drillers — and could make some consumer goods, like canned food, more expensive.

Cars and car parts: All cars assembled outside the US and all imported auto parts are subject to a 25% duty.

Trump has said the policy will spur investments and jobs in the US, but analysts say it could raise new car prices by thousands of dollars and add to the cost of auto repairs.

De minimis: In May, Trump ordered the closure of the de minimis rule, a shipping loophole that allowed retailers to send clothes and other goods from China directly to American shoppers without paying tariffs.

The rule allowed products up to US$800 to avoid levies and other red tape as long as they were shipped directly to US consumers or small businesses. It resulted in the rapid growth of e-commerce platforms like Shein and Temu, but made it difficult for US manufacturers to compete with the surge of low-cost Chinese products.

Other tariff threats: The President has issued a broad range of other tariff threats in recent months, including new duties on semiconductors and pharmaceutical products. Trump has also targeted the film industry, saying he would put a 100% tariff on movies made outside the US, and warned Apple that it could face a 25% duty on iPhones made in other countries.

Trump has taken aim at so-called BRIC nations, which include Brazil, Russia, India, and China. He recently threatened on social media to impose an additional 10% tariff on “Any Country aligning themselves with the Anti-American policies of BRICS.”

He has also singled out the EU, which he has said was formed to “screw” the US. The bloc faces a tariff of 50% if it cannot reach an agreement with the Trump Administration.

Why is Trump using tariffs?

Trump’s point of view appears to be that any trade deficit — when the value of goods the US imports from a country is more than what it exports to that country — is bad.

He has long described bilateral trade deficits as examples of America’s being “ripped off” or “subsidising” other countries.

The President and his advisers say their goal is to make the tariffs so painful that they force companies to make their products in the US. They argue that this will create more American jobs and push up wages.

But Trump has also described tariffs as an all-purpose tool to extract concessions from other countries.

The President also maintains that tariffs will rake in huge sums of revenue that the government can use to pay for domestic tax cuts.

Economists say tariffs cannot simultaneously achieve all of the goals that Trump has set.

In fact, many of his aims contradict one another.

The same tariffs that are supposed to increase US manufacturing are also making life painful for US manufacturers, by disrupting their supply chains and raising the cost of their raw materials.

“All of these tariffs are internally inconsistent with each other,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics, a Washington think-tank. “So what is the real priority? Because you can’t have all those things happen at once.”

Who pays for tariffs, and where does the money go?

A tariff is essentially a government surcharge on products imported from other countries.

Tariffs are paid by the companies that import the goods. The revenue from US tariffs is paid by US importers to the US Treasury Department.

For example, if Walmart imports a US$100 shoe from Myanmar — which now faces a 40% tariff — Walmart will owe US$40 in tariffs to the US government.

What happens next?

1 Walmart could try to force the cost onto the Myanmar-based shoe manufacturer, by telling it that Walmart will pay less for the product.

2 Walmart could cut into its own profit margins and absorb the cost of the tariff.

3 Walmart could raise the price of the shoes at its stores.

4 Or some combination of the above.

In May, Walmart’s chief executive cautioned that tariffs would push the company to start raising prices soon, and it refrained from projecting profits for its current quarter. Trump, in turn, scolded the retailer on social media, telling it to “EAT THE TARIFFS” and keep prices down.

How have companies responded?

One way to understand how companies are reacting to the tariffs is to think about Christmas.

The production of toys, Christmas trees and decorations is usually in full swing by now. It takes four to five months to manufacture, package and ship products to the US. And factories in China produce nearly 80% of all toys and 90% of Christmas goods sold in America.

Toy makers, children’s shops, and specialty retailers have begun pausing orders for the winter holidays as the import taxes have cascaded through supply chains.

Mattel, the US toy company and maker of Barbies, said it would raise prices on US toys because of Trump’s tariffs on imports from China.

How could tariffs affect consumer prices?

Tariffs are widely considered by economists to be a catalyst for price increases.

A company may be unable to absorb the cost of tariffs or force it onto overseas manufacturers or suppliers and may lay that cost at the feet of its customers.

But price increases have yet to show up in a significant way in broad measures of inflation like the consumer price index.

How could that be?

For one, rising inflation is a matter of when, not if, economists say, and we may start to see prices increase later this northern summer. And if products haven’t got more expensive yet, it’s partly because businesses stocked up on goods before levies were imposed, allowing them to hold off on raising prices until those stockpiles run out.

This article originally appeared in The New York Times.

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