HOW TARIFFS WORK

A tariff is a tax imposed by the government of a country on imports or exports of goods. They can be used as a source of revenue for the government, a form of regulation of foreign trade that taxes foreign products as safeguards for domestic industry, or as a means of persuasion. But in the end, it’s the consumer who pays for the tariffs.

1 The U.S. imposes a tariff on goods imported from China. Depending on the nature of the tariffs, China could retaliate with its own tariffs on U.S. imports.

2 Chinese products are shipped to the U.S. China pays nothing on the tariffs.

3 When the products arrive to the U.S., the merchants must pay for the tariffs to Customs and Border Protection to receive the products.

4 By the time the products hit the shelves, the merchants have raised their prices, passing the cost of the tariffs on to consumers.

5 Depending on the products, higher prices on imports from China could encourage U.S. consumers to buy less expensive products made in the U.S.

THE POWER OF TARIFFS

Revenue: Governments collect tariffs as they would income or sales tax. The money collected is put in the treasury and rolled into the state’s overall budget. However, in the U.S., tariffs accounted for less than 2% of the federal government’s revenue in 2024. Poorer countries often have far higher tariff rates than wealthier countries because their government depend on them for revenue.

Protect: The government may put high tariffs on certain imported goods if they feel the flow of goods is hurting domestic or regional producers. In this case, the goal of raising tariffs on imports would be to make those goods more expensive and give a price advantage to domestic goods and protecting businesses.

Influence: Governments can limit or ban the import or export of goods and services from another country to influence behavior in noneconomic matters such as human rights, treaty violations, or war. Tariffs can also be used to discourage certain trade practices like “dumping,” which is when companies export products to another country and sell them at artificially low prices to gain a competitive advantage.

Retaliate: Sometimes, when one country imposes a tariff on another country's goods, the exporting country responds with retaliatory tariffs of its own.

National security: A government may implement tariffs to avoid relying too heavily on different countries for goods deemed critical to security, like military supplies.

A TIMELINE OF TARIFFS

1:Tariff of Abominations (1828) Inflated the cost of imported goods up to 50% protect domestic industries by encouraging Americans to buy domestic products.

2: The Black Tariffs (1842) The Whig Party took control of Congress and, in a new wave of pro-tectionist support, raised tariff rates.

3: Morrill Tariff (1861) A tariff increase on imports designed to foster rapid industrial growth.

4: Mongrel Tariff (1883) Reduced high tariff rates marginally and left in place fairly strong protectionist barriers.

5: Underwood Law (1913) Replaced high tariffs with a new federal income tax.

6: Dingley Act (1897) Brought back protectionism by doubling tariff rates for wool, linen, silk, chin and sugar.

7: Emergency Tariff (1921) Passed by Republicans in hopes of saving U.S. farmers.

8: Smoot-Hawley Tariff Act (1930) The secondhighest tariff in U.S. history, raised tariffs on over 20,000 imported goods. The act prompted retaliatory tariffs by many other countries and worsened the effects of the Great Depression.

9: Reciprocal Tariff Act (1934) Authorized the U.S. president to negotiate 32 reciprocal trade agreements with 27 countries over the next 11 years.

10: General Agreement on Tariffs and Trade (1947) A legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas.

11: General Agreement Act (1979) This law gave the president the ability to waive the Smoot-Hawley Act of 1930 for imports from 57 countries.

12: Omnibus Foreign Trade and Competitiveness Act (1988) Signed into law by President Ronald Reagan to enhance the competitiveness of American industry, and for other purposes.

13: World Trade Organization (1994) Agreement signed by 124 countries to replace GATT.

14: Trump Tariffs (2018) President Donald Trump increased tariffs on most all products imported from China.

15: Trump Tariffs (2025) Average rate of tariffs of all imports under Trump’s proposals.

TARIFFS AND INFLATION

Most economists agree that Trump’s proposal of a sweeping 60% tariff on all goods imported from China, Mexico and Canada would result in higher costs for U.S. consumers, since tariffs are essentially taxes on imports, and the importing businesses typically pass those costs on to the end consumer.

According to U.S. Global Investors, the size of the impact would depend on the specifics. A hypothetical 10% tariff on all goods entering the U.S. would increase overall prices by an estimated 1.3% annually. Selective tariffs targeting specific goods or countries could be even more disruptive, especially in costs.

TARIFFS OR TAXES?

During his presidential campaign, Trump floated the idea of an “all tariff policy” which he said would allow the U.S. to eliminate income taxes. Until 1862, when President Abraham Lincoln signed into law a permanent internal tax system, tariffs were a major source of federal revenue. But federal spending levels in the U.S. have increased about 10 times the share of the economy since then. In the fiscal year 2024, excise taxes consisted of 2% of the federal government revenues, while individual income taxes accounted for 50% of revenues. Policy experts believe the idea of replacing income taxes with tariffs is an unrealistic proposal.