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What are tariffs, and how do they affect you?

Yahoo Personal Finance· Getty Images
10 min read

A tariff is a tax on imported goods usually aimed at protecting local jobs and industries from foreign competition. The idea is that if foreign materials and products are more expensive, you’ll buy more domestic goods.

Suppose, for example, that the U.S. government levied a new 10% tariff on cars imported from Japan. The tariff would push the price of a $50,000 Japanese vehicle to $55,000. So because the Japanese car is now more expensive, a similar American-made vehicle becomes more appealing to buyers.

Former President Donald Trump introduced tariffs on about $380 billion worth of goods in 2018 and 2019, breaking with decades of free trade policy. Trump has proposed new tariffs of 10% to 20%, plus an extra 60% tariff on Chinese goods if he wins a second term. Vice President Kamala Harris, the Democratic presidential nominee, has criticized the tariffs as “a national sales tax on everyday products.”

Not sure how tariffs work or where you stand on the issue? We’ll walk you through how tariffs work, why governments impose them, and how they affect you.

Most countries have tariffs of some sort, and the reasons for imposing them vary widely. Let’s look at some common reasons countries enact tariffs.

Like any other taxes, tariffs provide income for the government that levies them. In fact, tariffs were the primary source of revenue for the U.S. government during its early days until the federal income tax was established in the early 20th century.

Today, tariffs are a minuscule source of income for many developed countries like the U.S. and European Union nations. In the U.S., for instance, tariffs accounted for less than 2% of the federal government’s revenue in 2023.

Poorer countries often have far higher tariff rates than wealthier countries because their governments depend on them for revenue. For instance, Djibouti, The Gambia, and Belize all had average tariff rates above 17% as of 2021, compared to 1.5% for the U.S.

For developed nations, tariffs — also known as customs duties or import duties — tend to be protectionist. That is, they’re intended to give a price advantage to domestic goods, shielding a country’s businesses and workers from cheaper foreign competition. For example, Congress passed a sweeping range of tariff hikes, some as high as 60%, after the stock market crash of 1929 under the Smoot-Hawley Tariff Act to protect the farming industry.

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

For example, Trump cited national security concerns when he hiked tariffs on steel and aluminum because both are used for weaponry and military equipment. Though Congress is typically tasked with levying tariffs and taxes, the president has the authority to enact them unilaterally in the name of defense.

The World Trade Organization (WTO) largely supports free trade policies, but it allows countries to enact trade barriers like tariffs in response to human rights concerns. 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.

President Joe Biden, who has kept most of the Trump tariffs in place, accused China of dumping practices when he introduced new tariffs on about $18 billion worth of Chinese goods — including a 100% increase on electric vehicles (EVs) and a 50% increase on semiconductors.

Biden said in an interview with Yahoo Finance that China “flood[s] the market with EVs that are incredibly cheap.”

“They’re not making any money off them,” Biden said. “They’re doing it to put other people out of business.”

Sometimes, when one country imposes a tariff on another country's goods, the exporting country responds with retaliatory tariffs of its own. The Smoot-Hawley Act sparked a trade war as European nations passed retaliatory tariffs. Historians often blame the Smoot-Hawley tariffs for prolonging the Great Depression.

More recently, the U.S. tariffs Trump levied on Chinese goods were met with retaliatory tariffs. In April 2018, the Chinese government introduced tariffs of 15% and 25% on 94 food and agricultural products from the U.S. Meanwhile, China dropped its average tariff rate on imported goods from other countries between early 2018 and 2022.

Tariffs may seem like a topic that only matters to economic policy wonks. But tariffs affect you more than you think, even if you’re not directly cutting the check.

Trump has said that tariffs “are paid mostly by China,” rather than by Americans. But that’s not how tariffs work.

The company importing the goods — not the exporting company or country — directly pays the tariff. The duty is collected when the goods clear customs at the importing country’s port of entry.

“When you’re (a company) importing a good from another country, you’re effectively buying that good in that country,” said Michael Coon, an associate professor at the University of Tampa who studies international economics. “So you’re paying whatever price they’re charging in that country. Then it’s your responsibility to get the goods into your country. If you want to get the goods into your country, then you have to pay the import tariffs.”

So let’s say the U.S. levied a new tariff on laptops from China, and Amazon imports Chinese laptops. A broker representing Amazon would most likely pay the tax to the U.S. Customs and Border Protection Service when the goods enter the country.

But businesses almost always pass additional costs on to consumers. That means you, the customer buying the laptop, would typically wind up paying the tariff, even if you didn’t know it. The cost would get passed down to you in the form of a higher price.

Many retailers and trade groups opposed the Trump tariffs on Chinese goods, saying they’d need to raise prices due to the extra cost. The Footwear Distributors & Retailers of America, a trade group that represents the U.S. footwear industry, estimated that an additional 15% tariff on imported shoes from China would increase the price of a $49.99 canvas sneaker to $60.98, while the price of a typical hunting boot would jump from $190 to $231.03.

Tariffs are often levied in hopes that consumers will substitute domestic products for foreign-made goods. But a country imposing the tariffs may lack the infrastructure, natural resources, or cheap labor to produce comparable goods at the same cost, so buying local is often more expensive.

“Either we pay the higher price on the Chinese goods with the tariffs, or we pay the higher price to U.S. companies,” Coon said.

The effect of tariffs on jobs is also hotly debated. The tariffs Trump introduced on steel and aluminum were politically popular. They prompted a few shuttered steel plants to reopen and were credited with creating several thousand jobs in the metals industry.

But the negative effects of tariffs can also spill over to employment. Sectors like agriculture, for example, were hard-hit by tariffs China imposed in response to U.S. tariffs. For example, soybean exports dropped 63% in the first 10 months of 2018, while exports fell by 20%, according to the Congressional Research Service. The agricultural sector likely experienced some job losses as a result, some economists say. When tariffs are imposed on materials like steel and aluminum, industries that use those materials — like the manufacturing sector — face higher costs, which can negatively impact employment.

The jobs that are saved from tariffs often come at a high cost. The Peterson Institute for International Economics found that every job in the steel industry saved by the 2018-19 tariffs cost American consumers and businesses $900,000.

Tariffs can lead to higher prices. But the effect on inflation tends to be relatively minor.

“Tariffs affect very specific sectors of the economy, and inflation is looking at the economy as a whole,” Coon said. “The price of a few goods going up is not inflation.”

Trump’s tariffs were in effect well before shockwaves from the COVID-19 pandemic caused inflation to soar. The Economic Policy Institute estimated in January 2022 — a time when inflation was still skyrocketing — that removing the tariffs would have offset no more than 7.2% of the run-up in consumer prices.

Expect to hear more about international trade and tariffs as the Nov. 5 presidential election approaches. Here’s what each candidate has said about the issue.

Trump’s platform includes a call to “stop outsourcing, and turn the United States into a manufacturing superpower,” along with large tax cuts for American workers. Trump has suggested that tax cuts could be funded by a 60% increase in tariffs on Chinese goods and a 10% hike on other trade partners. The former president has even reportedly suggested eliminating the income tax and replacing it with higher tariffs in a meeting with congressional Republicans.

Researchers at the Peterson Institute for International Economics wrote that it would be “literally impossible for tariffs to fully replace income taxes,” noting that the federal government raises over $2 trillion annually from individual and corporate income taxes each year.

A recent Peterson Institute policy brief estimated that the 10% and 60% tariffs Trump has proposed would bring in just $2.25 billion per year — a number that’s “certainly an overestimate because it does not account for lower economic growth due to the inevitable economic shocks caused by retaliation against US exporters and the losses suffered by the import-dependent manufacturing sector,” researchers wrote.

Harris hasn’t discussed tariffs at length. However, in her Aug. 22 speech at the Democratic National Convention, Harris said Trump’s proposed tariffs would “raise prices on middle-class families by almost $4,000 a year.” However, the nonpartisan Tax Policy Center estimates a more modest increase of about $1,800 for an average household.

The vice president has not said whether she would keep the tariffs imposed by the Trump and Biden administrations in place.

What is a simple definition of a tariff?

A tariff is a tax levied on goods imported from a foreign country that’s often used to protect domestic industries and jobs.

What are the different types of tariffs?

There are several different types of tariffs, but the most common are ad valorem and specific tariffs. An ad valorem tariff is a tax that’s levied as a percentage of the imported product’s value. The 25% tariff imposed on steel, along with many imported Chinese goods, in 2018 is an example of an ad valorem tariff. A specific tariff is a flat tax charged on each imported good, e.g., $1,000 per vehicle or $50 per mobile device.

What tariffs did Trump impose?

Trump imposed roughly $80 billion worth of tariffs on steel, aluminum, solar panels, washing machines, and various other Chinese goods. Trump later lifted tariffs on steel and aluminum imported from Canada and Mexico.