Mar 27 The Impact of Tariffs & Duties on Today’s Economy
In addition to the income tax impact associated with the provisions of the Tax Cuts & Jobs Act, businesses and their owners have been recently forced to consider the short-term and long-term implications of the potential increase in tariffs and duties on goods imported to the United States. Furthermore, actions taken by foreign jurisdictions to alter the tariffs and duties placed on goods exported from the U.S. must also be considered.
The Future of Tariffs and Duties
Tariffs and duties are basically an additional tax placed on goods imported into a particular country. While planned increases in tariffs and duties surrounding steel and aluminum imported into the U.S. have received much of the attention from the press in recent months, these additional taxes are imposed on a number of different goods. The importer of record typically pays the tariff, with the end-user of the imported good generally impacted by an increase in cost. Be it a manufacturer or a construction company purchasing materials from overseas vendors or an individual buying the latest electronic gadget, the increase in costs is likely to wind up with the end-user.
Impact on the Economy
The U.S. federal government has sought to close the perceived competitive disadvantage due to relatively low-level tariffs and duties imposed on domestic imports, in comparison to the tariffs and duties imposed on goods exported to foreign jurisdictions. While the needle is still moving in terms of where the import and export tariffs and duties will ultimately land, the global economy is clearly impacted. From a U.S. perspective, proponents of the tariff system argue that the economy benefits from the taxation of imports, as the increased duties that foreign exporters would face provides a competitive advantage for domestic providers who are not subject to similar fees. Opponents of the system argue that a tariff and duty system limits competition, as purchasers have a smaller supply of vendors to choose from. Additionally, the trade agreements in place between countries throughout the world have received expanded scrutiny, as the governmental agencies look to renegotiate current tariff and duty policies in place to avoid an increase in the scope and amount of these costs.
Since the idea of an increase in domestic tariffs and duties was first introduced, there has been a lot of political banter as nations across the globe have sought to negotiate or re-negotiate trade agreements to stem the tide of higher costs to do business worldwide. With the threat of large increases to the tariff and duty system as a backdrop, we have seen the recent replacement of the North American Free Trade Agreement (“NAFTA”) with the U.S.-Mexico-Canada Agreement (“USMCA”), signaling a significant shift in some of the trade policies and provisions shaping the global economy. While the USMCA is still awaiting ratification, this agreement could be a precursor to renegotiated agreements with and between other countries. As the U.S. government, along with their foreign counterparts, weigh the consequences of trade agreements vs. tariffs and duties, the situation bears watching, as taxpayers across all industries will certainly be impacted.
Stephen J. Ehrenberg, CPA, MBT is a newly named Partner of Sax LLP and a member of the firm’s Manufacturing and Distribution Practice, providing 19 years of industry expertise in the areas of corporate, pass-through and individual tax compliance and consulting, as well as accounting for income taxes. He can be reached at [email protected].