Tariffs Explained: What They Are, How They Work, Are They Taxes

Until recently, tariffs rarely made headlines. Today, however, they play an important role in U.S. economic policy, affecting the price of everything from grocery storeto carto holiday giftsand the prospect of unemployment, inflation and even recession.

I am economist People who study trade policy, I find that a lot of people have questions about tariffs. This primer explains what they are, what impact they have, and why governments impose them.

What are tariffs? Who pays the customs duties?

Tariffs are taxes on the import of goods, usually to protect a specific domestic industry from import competition. When a U.S. business imports goods, U.S. Customs and Border Protection sends it a tariff bill, which the company must pay before the goods enter the country.

As tariffs increase costs for U.S. importers, the companies often pass the costs on to customers by raising prices. Sometimes, importers choose to bear some of the cost of tariffs so that consumers don’t switch to more affordable competing products. However, companies with low profit margins may run the risk of going out of business if they do this for an extended period of time. Generally speaking, the longer tariffs are in place, the more likely The company passes the costs on to customers.

Importers can also ask foreign suppliers to absorb some of the tariff costs by lowering export prices. But if exporters can sell to other countries at higher prices, they have no incentive to do so.

A study of Trump’s 2025 tariffs shows that U.S. consumers and importers are already paying the price, with little evidence that foreign suppliers bear any burden. Six months after tariffs were implemented, importers are absorbing Up to 80% of costsuggesting they believe the tariffs will be temporary. If Supreme Court allows Trump tariffs to continue, burden on consumers may increase.

While tariffs apply only to imported products, they often also indirectly push up the price of domestically produced goods. This is because tariffs reduce the demand for imports, which in turn increases the demand for substitutes. This allows domestic producers to also raise prices.

A brief history of tariffs

this United States Constitution Grants all tariff and tax-setting powers to Congress. Early in American history, tariffs were used to fund the federal government. Especially after the Civil War, when U.S. manufacturing was growing rapidly, tariffs were used to protect U.S. industry from foreign competition.

The personal income tax, introduced in 1913, replaced tariffs as the main source of tax revenue in the United States. The last major U.S. tariff law was the Smoot-Hawley Tariff Act of 1930, which established The average tariff rate is 20% By 1933 all imported.

those tariffs triggering foreign retaliation and a global trade war The Great Depression. After World War II, the United States led the establishment of general agreement on tariffs and tradeor the General Agreement on Tariffs and Trade, which promotes tariff reduction policies as key to economic stability and growth. As a result, the global average tariff rate fell from around 40% in 1947 to 3.5% in 2024. The average U.S. tariff fell to 2.5% that year, and about 60% of all U.S. imports Duty-free entry.

While Congress has formal responsibility for tariffs, as long as it adheres to constitutional boundaries, it can delegate emergency tariff powers to the president for swift action. Current Supreme Court cases involve Trump’s use of International Emergency Economic Powers Actor IEEPA, to unilaterally change all U.S. general tariff rates and deadlines for each country by executive order. The controversy stems from claims that Trump exceeded the constitutional powers granted by the act, which no mention of tariffs or specifically authorizing the President to implement these measures.

Advantages and Disadvantages of Tariffs

But the bigger question, in my view, is whether tariffs are good policy or bad policy. this disastrous experience The tariff wars during the Great Depression sparked a broad global consensus in favor of freer trade and lower tariffs. Research tendencies in economics and political science Support this viewAlthough tariffs never disappeared as a policy tool, especially for developing countries with limited sources of tax revenues and a desire to protect their emerging industries from imports.

However, Trump’s reinstatement of tariffs is not only a protectionist tactic but also a source of government revenue in the world’s largest economy. In fact, Trump insists tariffs can replace personal income taxa view doubted by most economists.

Most of Trump’s tariffs have a protectionist purpose: to support domestic industry by raising the price of imports and shifting demand toward domestically produced goods. The aim is to increase domestic output and employment in tariff-protected industries whose success may be more valuable to the economy than open markets would allow. The success of this approach depends on the flow of labour, capital and long-term investment into protected sectors in a way that increases efficiency, growth and employment.

Critics argue that tariffs require trade-offs: favoring one group of industries necessarily hurts others, and raise prices for consumers. Manipulating prices and demand can lead to market inefficiencybecause the U.S. economy produces more of the less efficient goods and less of the more efficient goods. In addition, U.S. tariffs have led to retaliatory trade actions abroad, hurt U.S. exporters.

Trump’s tariffs also impose uncertainty costs as he constantly threatening, changing, canceling and restoring them. Companies and financiers will tend to invest in protected industries only if tariff levels are predictable. But Trump’s negotiating strategy involves multiple reversals and new threats, making it difficult for investors to calculate the value of those commitments. One study estimates that this uncertainty has actually U.S. investment fell 4.4% 2025.

A major, if underappreciated, cost of Trump’s tariffs is that they violate U.S. global trade agreements and GATT rules on nondiscrimination and tariff binding. This makes the United States a less reliable trading partner. The United States was This system was previously supportedbringing stability and cooperation to global trade relations. Now, the United States is implementing trade policy through unilateral tariff increases and confrontational rhetoric, and its trading partners Already started watching Establish new, more stable and growing trade relationships.

So what’s next? Trump vows to use Other emergency tariff measures If the Supreme Court overturns his IEEPA tariffs. Therefore, as long as Congress is unwilling to intervene, the United States’ aggressive tariff regime is likely to continue regardless of the court’s decision. That means public perception of tariffs — and who pays them and what they change — remains critical to understanding the direction of the U.S. economy.

Kent JonesProfessor Emeritus of Economics, Babson College

This article is reproduced from dialogue Licensed under Creative Commons. read Original article.