Why Your New TV Costs More: The Hidden Tariffs You’re Already Paying

I may have been in the market for a new big screen TV this past holiday season. It’s no surprise that manufacturers sell a lot of TVs at the end of the year. The reviews I read rated the Samsung and Hisense brands highly. Samsung is a South Korean company; Hisense, Chinese. Once you sort out the features you want and try to compare same to same, it often comes down to price. Wouldn’t you know it, though, the list prices of comparable models was within $25!  

This is not my actual living room. (Source).

Tariffs on TVs from China increased by 7.5% in 2018. This is on top of the existing 3.9% general duty tariff. These higher tariffs led to increased supply chain costs and higher average selling prices. Manufacturers had to either accept slimmer profit margins, or pass the price increase on to consumers.  Longer-term consequences of the tariffs were also seen.

What are tariffs, anyway?

There’s a lot of talk about tariffs these days. Because politics. There are always two sides, but let’s start with the basics. We’re going to try to stay away from the firebrand aspects of the topic while giving you enough information to understand what could be coming with a new administration.

Let’s take a step back and look at what tariffs are. Tariffs are not much different than a tax levied on imports. Fees are charged to manufacturers of certain products in specific countries to import their products into the US. The fees make foreign products more expensive.  

What is the main purpose of tariffs?

Tariffs, on the surface, are a trade protectionism mechanism. They’re designed to make local goods more competitive by making foreign competition more expensive. For example, if a foreign country has a lower standard of living and pays their employees significantly less than the going wage in the US, they can produce labor-intensive products much cheaper. That’s the case with technology from China, mangoes from Mexico, and textiles from India.

The intended purpose of tariffs is to boost domestic production, keep jobs from going overseas, and protect US interests. Ironically, tariffs tend to put a thumb on the scale of the international trade balance.  It’s somewhat ironic for a free-market capitalist society like the United States to say, we don’t trust the free market. Tariffs are put in place to encourage intended behavior. Or, more correctly, to punish undesired behavior.

Do they serve any other function?

In addition to influencing trade patterns, tariffs can have other intended functions.

1. Revenue generation. Historically, especially, around the time of the founding of the country, trade tariffs were a significant contribution to the government revenue. Income taxes have replaced in the 20th Century as the major source of revenue.
2. Trade policy. Protectionism is related, but tariffs can influence trade patterns and behavior of other countries. Tariffs have been used to combat unfair trade practices by other countries. China, for example, has been accused of unfair trade practices. The reported trade practices include preferential treatment of state-backed businesses and allegations of forced labor. China has also been accused of dumping below cost low-priced, poor-quality merchandise in an attempt to manipulate demand. Tariffs exist on many products from China, yet it remains one of the US’s strongest trading partners.  
3. Economic development. In developing countries, tariffs can aid economic development to businesses just starting out. Again, it sounds like protectionism.  
4. Negotiations. Even the threat of tariffs have brought countries to the negotiating table to discuss trade policies. “Hey, Yugoslavia. We’d really like you to limit the number of $3,000 Yugos you export to the United States. It would really be a shame for us to have to put a %100 tariff on those cars.” In other words, if you want access to one of the largest markets in the world, you’ll need to play by our rules.

Are there any unintended consequences of tariffs?       

Tariffs often do affect what they intend to, but rarely to the extent expected and without other consequences.

1. Trade wars. While tariffs can influence trade policy, they can also lead to trade wars.
2. Decreased local production. The 2018 steel and aluminum tariffs did reduce imports, but domestic production did not fill the gap. Manufacturers who depended on the raw material had to either source at a higher price or decrease production.  
3. Higher consumer costs. The intention is to shift consumer demand to equivalent domestic products. Consumers are fickle, though. Sometimes cost is not enough to shift consumer sentiment. Tariffs may also disrupt a fragile supply chain. Ultimately higher manufacturing costs are passed on to the consumer.
4. Shifts in trade patterns. Tariffs are like squeezing a balloon. Companies forced out of a market, find loopholes. These big, multinational companies find ways around the tariffs. Hisense, faced with tariffs on its electronics, shifted manufacturing to Vietnam. Other Chinese companies moved production to Mexico and Thailand. Samsung, the Korean company primarily manufactures in Mexico, Vietnam and South Korea. Wooden cabinets made in China ended up in US homes after skirting tariffs by using Malaysia as a middleman. Assembly operations have shifted to countries with more favorable tariffs.

If tariffs worked the same way as a teeter-totter, that would be the end of the story: Prices of foreign products increase, and people buy more local. While tariffs aim to protect domestic industries or correct trade imbalances, their unintended consequences often complicate their effectiveness. Economies are complex things. They can disrupt economies, strain relationships, and spark stagnation of innovation. Policymakers need to weigh carefully the potential downsides against intended benefits.

Who do they benefit?

Spoiler alert: it may not be who you think. Nguyen Huu Phuc, who runs a small textile marketing company in Ho Chi Minh City, Vietnam, noted in 2018 that the US-China trade war benefited his country more than any other in Asia. His garment-making company doubled its staff to meet demand. US imports from Vietnam increased 40% from the previous year, while imports from China fell by 13 per cent over the same period.  

So, while the US and China duked it out, Vietnam flew under the radar and quietly courted companies in the crosshairs of the tariffs. Six years later, that may change as the US appears content to play whack-a-mole with its tariff policies. By some accounts, tariffs are a big blunt instrument. Others suggest it is a panacea to fix trade imbalances. Neither is it a focused policy tool. Regardless, while tariffs are imposed by one country on the goods imported from another country, there are other winners and losers, including third-party countries and the US consumer.

That big screen TV

So, what did I end up doing about the TV? We bought a Samsung. Because we had purchased Samsung appliances earlier in the year, we had some “Samsung cash.” Incentives to buy Samsung products in the form of real dollars. Now I have an app on my Samsung phone that tells me when the clothes in the Samsung dryer are ready and what channel the Samsung TV is on.