What Is a Tariff?

A tariff is a tax levied on imported goods when they enter the country. It could be calculated as a fixed amount or a percentage of the price of the goods it’s applied to. The government might impose a tariff to raise revenue or protect domestic interests. Whatever the purpose of the tariff, economists say much of its cost is passed through to domestic producers and consumers in the form of higher prices.

Who has the power to impose tariffs?

Generally, decisions about taxes fall to Congress. But, through a string of laws dating back to 1934, legislators have given the president and his cabinet considerable authority over tariffs.

When President Donald Trump levied tariffs on steel and aluminum imports in 2018, he cited part of the Trade Expansion Act of 1962, which allows the president to set tariffs on imports that the secretary of commerce says pose a threat to national security ^[0]

President Joe Biden did something similar in May, citing a section of the Trade Act of 1974 to empower the Office of the United State Trade Representative to increase tariffs on China ^[0]

Legislators have introduced multiple bills during the past two presidential terms aimed at limiting the president’s unilateral tariff-setting power. In a recent example, Sen. Rand Paul (R-KY) has proposed the No Taxation Without Representation Act, which would require Congressional approval for any tariffs.

Who pays tariffs?

Tariffs imposed by the U.S. government are paid by the domestic companies that import the relevant goods or materials. But ultimately consumers foot the bill, since those companies tend to raise prices to cover higher import costs.

Some U.S. companies that depend on imported goods and materials already have outlined plans to raise prices to pay for tariff increases promised by Trump during his presidential campaign, the Washington Post reported ahead of Trump’s election win ^[0]

Because the tax is levied on import prices, not consumer prices, the price hike that consumers face shouldn’t be as big as the one paid by the importer, Paul Donovan, chief economist with UBS Global Wealth Management, said in commentary released Oct. 16 ^[0]

The import price typically represents less than half of the consumer price of a good, Donovan said. That means, “a 20% tariff should raise consumer prices for imported goods less than 10%.”

That’s no guarantee, though. Donovan added: “Retailers may use the narrative of a 20% tax to raise their prices more than the tariff cost alone.”

What's the purpose of a tariff?

A nation like the United States might impose tariffs to increase revenues for the federal government, motivate trade partners to change behavior or protect domestic industries that are losing to foreign competitors.

Generate revenue

For a long time, import tariffs were the U.S. government’s main source of income, according to the Cato Institute, a libertarian think tank. But that started to change when the first income tax was put in place during the Civil War in 1862 ^[0]

In fact, tariffs haven’t been a major part of the U.S. budget since 1914, according to economic researchers at the Peterson Institute for International Economics, a nonpartisan think tank ^[0]

For tariffs to be a reliable income source, they have to be low and targeted enough to continue encouraging trade, the Cato Institute says. If they’re too high or broad, the market will shift to favor goods from sources that aren't taxed in the same way — or discourage imports altogether.

That can put this goal of generating revenue at odds with the other goals of import tariffs.

Influence trade partners

Especially recently, it’s common for U.S. tariffs to serve as a foreign relations tool to influence trade partners’ behavior. By taxing certain goods — perhaps those coming from a particular country or region — the U.S. is trying to shift the market away from those sources.

Protect domestic industries

At the same time that tariffs could penalize a trade partner, they can buoy domestic industry by creating demand for goods from an alternative source. The goal is to protect domestic producers from cheaper goods being made by foreign competitors. In turn, that’s meant to create jobs and promote innovation at U.S.-based companies.

Encouraging domestic production of certain goods also is believed to serve a national security interest.

Are tariffs good or bad?

Mainstream economists largely characterize tariffs as inefficient and ineffective, especially when imposed broadly.

Here are a couple examples of economists casting doubt on the use of tariffs:

In an October 2024 article, Kimberly Clausing and Maurice Obstfeld of the Peterson Institute for International Economics said across-the-board tariffs, like those proposed by Trump, are costly because they raise prices not only on imported goods but also on those sourced domestically ^[0]

“Simply put, protectionism reduces the gains from trade,” Clausing and Obstfeld said. “We choose to pay more than necessary for some goods (imports and their domestic substitutes) instead of focusing on those goods that we produce more efficiently than foreigners.”

In another recent article — this one written by Michael Strain, director of economic policy studies and senior fellow with the American Enterprise Institute — argued that trade policies of the past two administrations have not met their own goals ^[0]

“They have caused manufacturing employment to decline, not to increase,” Strain wrote. “They have not reduced the overall trade deficit; they have not led to a substantial decoupling of the U.S. and Chinese economies.”

Examples of tariffs

Tariffs are in place on a variety of imported goods.

In 2018, Trump levied tariffs of 10% to 50% on a huge range of goods, mostly from China, including solar panels, washing machines, as well as steel and aluminum.

In his current bid for president, Trump says he would impose a 10% tariff on all imports, which would be added to any existing tariffs.

Biden has expanded some of Trump’s tariffs. In May, he increased tariffs on steel and aluminum, semiconductors, electric vehicles, batteries, medical equipment and solar cells, among other goods coming from China. After the increases, tariff rates on these items range from 25% to 100%.