Tax Savvy: What Is A Tariff? How Does It Affect Us?

Right off the bat, no, the foreign country does not pay the tariff—the importer pays the tariff.

Most of us have heard the word "tariff" in news headlines, but few truly understand what it means in the real world.

At its core, a tariff is simply a tax on imported goods. When a country imposes a tariff, it requires businesses to pay an additional cost when bringing specific foreign products across its borders.

But tariffs aren't just economic instruments. They're powerful policy tools that reflect how countries see themselves in relation to others.

When we impose tariffs, we're making a statement about what we value and how we view our place in the global community.

Here in the Philippines, where we import everything from rice to electronics, tariffs shape not just prices but our entire economic landscape.

How does it affect us?

Tariffs impact our daily lives in ways most of us never notice. That extra few thousand pesos on your new shoes or gadgets? Potentially a tariff.

The rising cost of your favorite imported beer? Likely influenced by tariffs, among many other things.

When a government places a tariff on foreign steel, for example, everything made with that steel—from cars to refrigerators—potentially becomes more expensive for consumers.

Companies using imported components must either absorb these additional costs (reducing their net profits) or pass them along to customers through higher prices.

But the effects extend beyond our wallets. Tariffs reshape supply chains, influence job markets, and even alter international relationships.

They're like stones thrown into the pond of global commerce—creating ripples that eventually reach all shores.

The Good Side

Tariffs, when thoughtfully implemented, can serve noble purposes.

First, they can protect budding domestic industries that need time to develop. When a country is trying to build its own manufacturing capability in a particular sector, tariffs provide breathing room by making foreign competition less threatening.

Take this simple, though not complete, example:

You have a local phone maker who employs your neighbors and supports local suppliers. They sell the X Phone for 6,000 pesos, which lets them pay fair wages and maintain quality.

When a foreign company sells their Z Phone for 4,500 pesos, it seems like a win for buyers.

But every phone sold means less money flowing through your local economy—fewer jobs, reduced wages, struggling local businesses.

This is why governments use tariffs. By raising the Z Phone's price to 6,000 pesos through import fees, they ensure your local manufacturer can compete fairly.

It may even incentivize foreign companies to build local manufacturing plants to avoid paying the tariff altogether.

Second, tariffs can preserve essential national industries.

Some sectors—like agriculture or small-scale manufacturing—might be considered too important to become dependent on foreign suppliers.

Filipino farmers, particularly rice producers like those in Luzon and Mindanao, gain breathing space when facing competition from heavily subsidized agricultural products from neighboring countries.

Third, and perhaps most importantly, tariffs can serve as leverage in negotiating fairer international trade practices.

When Country A places tariffs on goods from Country B that engages in unfair subsidies or environmental shortcuts, it creates pressure for Country B to reform by artificially decreasing demand for their products.

The Bad Side

For all their potential benefits, tariffs come with significant downsides that often outweigh their advantages.

The most immediate effect is higher prices for consumers.

When we tax imported goods, we're essentially choosing to make our own citizens pay more.

This burden falls disproportionately on lower-income households, who spend a larger percentage of their income on retail goods.

Tariffs also invite retaliation. When a country imposes tariffs on another country's exports, they almost always respond with tariffs of their own.

This tit-for-tat escalation can quickly spiral into trade wars where everybody loses.

Perhaps most concerning is how tariffs can mask deeper problems.

Rather than forcing industries to innovate and become more competitive, tariffs can create protected environments where inefficiency persists. The temporary shelter often becomes permanent dependency.

History shows that extensive tariff regimes can deepen economic crises rather than alleviate them.

One such example is the economic downturn caused by the Smoot-Hawley Tariff Act in the US, which contributed greatly to the worsening of the Great Depression.

Meant to safeguard American farmers, the Smoot-Hawley Tariff Act raised the average import tax by an average of 40% to 60%.

Many countries retaliated with their own tariffs on American-made goods and highlighted how dangerous protectionist policies can be for global economies.

In time of war, we blockade our enemies in order to prevent them from getting goods from us. In time of peace, we do to ourselves by tariffs what we do to our enemy in time of war. — Milton Friedman paraphrasing Henry George

Why A Free Market Wins

No nation on Earth truly stands alone.

Even the wealthiest and most resource-rich countries find themselves lacking in crucial areas—whether it's rare minerals, agriculture, or manufacturing. Resources are distributed unevenly across our planet, forcing all of us to engage with one another to thrive.

Innovation thrives in environments that embrace both cooperation and fair competition.

Free markets aren't perfect, but they create natural incentives for constant improvement. When businesses must compete globally, they focus relentlessly on delivering better value.

They invest in research, streamline processes, and develop deeper understanding of customer needs.

Countries that have embraced relatively free trade provides an environment for businesses to thrive.

The European Union recognizes this and so the European Free Trade Area (EFTA) and the European Economic Area (EEA) were born.

. . . [The Union] seeks to promote balanced and sustainable development and ensures free movement of persons, services, goods and capital, and the freedom of establishment. — Preamble, EU Charter of Fundamental Rights

The most successful economies maintain a delicate balance—they participate fully in global markets while ensuring that participation remains fair and that transitions don't leave vulnerable populations behind.

Conclusion

Tariffs are neither inherently good nor bad—they're tools. Like any tool, their value depends entirely on how and why they're used.

The most successful nations approach tariffs with clear objectives, transparent timeframes, and an honest assessment of both benefits and costs.

They recognize that while protecting domestic industries has appeal, the long-term strength of an economy comes from innovation, efficiency, and meaningful participation in global commerce in a globalized world.

The best tariff policy isn't about winning against other countries—it's about creating conditions where all sides can develop resilient, innovative economies that lift the standard of living for their citizens.

As with most complex issues, the answer isn't found in extremes but in thoughtful balance.

Global commerce doesn't have winners and losers—it has players who either thrive together or struggle together.

Our approach to tariffs should reflect this fundamental truth or force our citizens to suffer in the name of global politics.