A tariff is a tax imposed on imported goods with the aim of protecting domestic industries and generating revenue. The importer pays the tariff to U.S. Customs and Border Protection, and often the cost is passed on — fully or partially — to consumers in the form of higher prices. As a result, goods from tariffed countries may become more expensive for buyers.
Tariffs are sometimes confused with value-added taxes, but they are not the same. VATs are generally imposed on both domestically produced and imported goods and services at each stage of production and distribution. Businesses can typically deduct the VAT they have paid on their purchases (input VAT) from the VAT they collect on their sales (output VAT), ensuring that the tax burden ultimately falls on the final consumer.
Types of tariffs
Tariffs vary based on the goods being taxed. For example, imported steel and aluminum, regardless of country of origin, might have a 50% tariff, while all goods from Canada and Mexico might be subject to a 25% tariff. Additionally, agricultural tariffs are treated differently from tariffs on manufactured goods.
Tariffs on raw materials may lead to higher prices on finished products. For example, if auto manufacturers pay more for steel and aluminum, they may set higher prices for cars. Farmers sometimes benefit from protective tariffs, trade restrictions and export subsidies. However, they can also face retaliatory tariffs from other countries. For instance, in 2018, high retaliatory tariffs on U.S. agricultural exports led the federal government to authorize $61 billion in relief payments to support farmers and ranchers.
Effects of tariffs on trade
Most economists agree that tariffs have a place in any overall economic plan, particularly if they are strategically targeted and narrowly focused. Examples of such focus include:
- Protecting domestic industries by making foreign goods less competitive.
- Addressing trade imbalances with specific countries.
- Responding to unfair trade practices.
However, broad tariffs can lead to a reduction in exports for these reasons:
- Higher costs for raw materials can reduce manufacturing output.
- Trading partners may impose retaliatory tariffs, increasing the cost of U.S. exports.
- Tariffs may influence currency values, making U.S. goods more expensive for foreign buyers.
- Domestic manufacturers may shift focus to selling within the U.S., potentially oversupplying the market and driving prices down.
Who pays for tariffs?
Although tariffs are paid by importers, the costs are often passed to consumers. Because lower- and middle-income households spend a larger share of their income on goods, they may be more affected by any rising prices. At the same time, some companies may benefit from tariffs in the short term, as reduced competition can allow them to charge higher prices.
Tariffs are one component of trade policy, but they are typically used alongside other economic tools, such as fiscal and monetary policies. Their impact depends on how they are structured and the broader economic environment in which they are applied.