What Are Tariffs and How Could They Impact Your Finances?

Tariffs have certainly been making headlines in recent months. When you hear the word tariff, you might think they only apply to the government or big companies. But tariffs can have very real impacts on your everyday finances. This article breaks down what tariffs are, how they work, who pays them, and how they could impact your wallet.

What Is a Tariff?

A tariff is essentially an import tax charged by a government on goods imported from other countries. Think of it like a fee that foreign companies must pay to sell their products in your country.

How Do Tariffs Work?

Tariffs are usually set as a percentage of the product’s total cost. So, if there's a 20% tariff on a $100 item, the company importing it will be charged $20 by the local government, increasing the cost to $120.

Tariffs are often designed to raise the price of imported goods to discourage their consumption and encourage citizens/consumers to buy domestic products instead. For example, if the U.S. places a tariff on electronics, companies that bring electronics into the country must pay a tax. That tax can make the imported electronics more expensive than American-made alternatives, which helps local producers compete.

Who Pays Tariffs?

So who pays tariffs? It depends on your perspective. Typically, companies that are importing goods from another country pay the tariffs to their home government. In the United States, U.S. Customs and Boarder Protection would collect the tariffs from U.S. companies importing goods. But here's the catch: importing companies rarely absorb the extra costs themselves. Often, they pass some or all the extra cost on to consumers. That means you might end up paying more for the same item because of a tariff. Sometimes, exporting companies will absorb the cost of the tariff to maintain good relationships with their customers or to maintain market share.

How Tariffs Could Impact Your Finances

We know that tariffs increase the cost of goods imported from other countries. So how could tariffs personally impact you and your finances? Let’s dive into it:

1. Higher Prices on Everyday Goods
If tariffs are applied to items you buy regularly such as household goods, clothing, food, medication, or electronics, their prices are likely to increase. This can slowly chip away at your budget. Even a couple more dollars per item can really add up over time.

2. Inflation
Widespread tariffs can lead to overall price increases in the economy. This contributes to inflation, meaning your money doesn’t go as far as it used to.

3. Changes in Job Markets
While charging tariffs can help protect some domestic jobs, they can also hurt other jobs, especially those that rely on imported materials. If costs go up, companies might slow hiring or even cut jobs to stay afloat.

4. Investment and Retirement Accounts
If you’re invested in a 401(k), IRA, or other retirement plan, the ripple effect of tariffs could impact your returns, especially if companies affected by tariffs underperform because of the increased costs.

5. Shifts in Product Availability
Sometimes, tariffs can lead companies to stop selling certain products entirely if costs become too high. That could mean fewer choices or less affordable options for consumers.

Can Tariffs Be a Good Thing?
Tariffs aren’t all bad news. They can encourage consumers to buy domestic goods, which can stimulate domestic business and job growth. If your job is in an industry protected by tariffs, you might benefit directly.

While there are pros and cons to tariffs, the ripple effects can have a real impact on your finances. Being aware of how tariffs work can give you a better understanding of the broader economy and helps you make smarter choices when budgeting, shopping, or planning for your financial future.