Everywhere I looked for the past few weeks—TV, newspaper, Twitter, dinner table—it was the same word: tariffs. Who’s putting them, who’s suffering from them, what does game theory say about them, what does some professor sitting in an air-conditioned room think about them? All noise. And yes, I consumed all of it. I watched every video, read every thread, argued with strangers, and explained it to every friend who accidentally called me.
But at some point, I realized—we’ve made this whole thing way too complicated.
We keep quoting fancy frameworks and global theories, but we’ve forgotten how to explain them in simple terms. The kind of explanation that would make sense to a school kid. Or to our grandmothers who still know how to save ₹10 better than most finance ministers.
So here I am, going back to the basics. Starting from the first principles. Stripping off the jargon. And trying to answer a very simple question: What even is a tariff, and why does everyone keep pretending it’s rocket science?
This means that whatever good enters your country for you to buy and consume, the government will take some percentage of the money you would spend to buy that product in the name of tariff or customs duty. This will make the product expensive and reduce the standard of living because money has an opportunity cost.
Why do we trade?
Humans have always engaged in voluntary transactions. It started with the barter system, and then it became the reason for the invention of money. There are many things that we cannot produce in our country, e.g., oil in India, and many things that we choose not to produce in our country, e.g., shoes and clothes in America.
Consuming a wide variety of things makes our lives richer and gives us a higher quality of life. The things that are not grown in the fields of our country or the goods and services that are not produced in the factories and offices of our country, we buy from other countries.
Why rich countries don’t produce shoes and clothes?- Comparative Advantage.
The simplest function of economics is the allocation of resources to their most efficient use. Let us start with a very Indian thing. What do we Indians do when the screen of our phone breaks, our ceiling fan stops working, or the mixer grinder doesn’t work?- Obviously, call Dinesh uncle (our electrician) to repair. But in Australia, people will not even think of calling an electrician to repair a broken electronic device, they will throw it and buy a new one.
WHY??
Because in India, labor is cheap, and in Australia, material things are cheap.
This one statement is one of the most profound insights of Economics. We produce things where it is the cheapest to produce them. When a country gets richer, it imports the low-value-added things and produces high-value-added things. For a healthy and prosperous life, we also need things that are low-value added but are not produced by the people of our country. When a country puts tariffs, it distorts the basic function of Economics.
In Australia, the minimum wage for labor is $25/hour, for an eight-hour shift, this costs around $200. In India, Rs. 11,000 a day. In India, the minimum wage is Rs. 400/ day. Now, if you are a businessman, where would you like to produce your goods?
This is why rich countries do not manufacture things that do not earn them money enough to give high salaries and earn profits.
When tariffs protect local industries, they often force a country to keep doing things it’s bad at. It’s like asking the kid who failed math to tutor everyone else because he’s local. It might feel patriotic, but it’s definitely not efficient—and definitely not the way to get better grades.
Global Supply Chains – Why Tariffs Break the Flow of Things
These days, nothing we use is made entirely in one country. Your mobile phone wasn’t really “Made in China.” It was Assembled in China. The processor might be from Taiwan, the screen from South Korea, the design from the U.S., and the charger from a factory somewhere in Gurugram.
Each country plays a role in making the final product. It’s like an assembly line stretched across the entire world. When countries work together like this, things get made faster, better, and cheaper.
Now imagine one of these countries suddenly deciding to charge extra for a part—say, a tariff on camera components. Then another country retaliates with a tariff on batteries. The entire cost of the product increases. Timelines get messed up. Businesses suffer. And the final consumer—you and me—end up paying more for the same phone.
Tariffs don’t just make foreign products expensive—they hit your wallet where it hurts.
It’s like the government slaps a tariff on phone components, and suddenly your ₹15,000 phone becomes ₹20,000. Same phone. Same features. Just more expensive—because somewhere along the chain, someone decided to make trade emotional.
Understanding Fundamentals
1. What Is a Tariff?
“It’s like a tax the government puts on stuff that comes from other countries.”
2. Why Do Countries Use Tariffs?
Protect local businesses: “We want our Mahindra and Bajaj to sell better than the fancy German Mercedez.”
Make money: “The government gets a little piggy bank bonus every time something gets imported.”
Punishment/pressure: “It’s like saying: ‘I don’t like how you’re playing the game, so I’m making it harder for you to sell stuff to me.’”
3. Who Pays the Price?
Spoiler: Not the foreign country. It’s us. Say it louder for the kids if they become US presidents in the future.
Example: “If you make people pay extra for Indian tea, Indian tea gets more expensive. Everyone cries.”
4. How Do Tariffs Affect Prices?
Basic supply and demand
Higher tariffs = higher prices = angry parents in the market.
5. What Happens When Countries Fight With Tariffs?
Introduce trade wars, which are like tantrums but with spreadsheets.
“If one country puts a tariff, the other country might say: ‘No fair! I’ll tariff you right back!’”- Exactly what is happening between China and the USA.
Nobody wins, except maybe economists who write op-eds about it.
6. What If There Were No Tariffs?
You would live a great lifestyle. Whatever will be produced in the world, you will get it at the cheapest price possible.
7. Simple Analogy
“You trade your apple for a chocolate. Then, the teacher says, ‘You can’t have that chocolate unless you pay Rs. 5 to the school .’ That’s a tariff.”
8. Who Likes Tariffs and Who Doesn’t?
Local businesses: “Yes please!”
Shoppers: “No thanks.”
Politicians: “Depends who’s voting.”
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Why is the Unseen Effect greater than the Seen?
Although this quote is self-explanatory, still I would like to explain it in the Indian context with a hypothetical example.
Some Indian steelmakers go to the Prime Minister of India and the following conversation takes place:
Steel Makers: Sir, China is producing steel at a cheaper cost than us and wants to sell it to Indian consumers at a cheaper price.
Prime Minister: Oh great, this will give cheaper steel to Indians. They will construct cheaper homes, and Mahindra will be able to produce cheaper Scorpio. And we will also be able to export more things made of steel to other countries, this means more income from the exports also.”
Steel Makers: No sir, our profits will get reduced. How will we pay our employees? You know, the steel industry in India employs a large number of poor and lower middle-class Indians, what will happen to their jobs?
Prime Minister: Yes, you are saying right. If they will lose jobs, who will give us votes? Let us impose a 50% tariff on foreign steel coming to India. This will make the price of their steel higher in India than the steel produced by you guys. And save all the thousands of jobs in the steel industry.
This is because the job losses of steelworkers are visible, but the new jobs the cheaper steel will create are not visible because they have not yet been created.
At the end of the day, a tariff is just a tax—with a better PR team. It gets dressed up in patriotic slogans and economic justifications, but it’s still a cost that someone has to pay. And spoiler: that someone is usually you.
Sure, there are arguments about protecting jobs, industries, or “strategic interests.” But in most cases, tariffs are like putting a band-aid on a leaky pipe—it looks like you’re fixing something, but you’re mostly just postponing the real work. The unseen effects—the things that could’ve been built, bought, or improved if prices were lower—are what quietly shape the future.
So the next time someone proudly announces a new tariff, just remember: it might save a factory today, but it could make your samosa cost ₹70 tomorrow.
And if you’re still confused, try explaining it to a school kid. If they get it before the economists on TV do, you’re probably on the right track.
This is a good explanation! Thanks for making it simple!
Yess, thanks for actually making it easy to understand with a touch of humour too!;)