President Trump, an avowed fan of tariffs, is set on Feb. 1 to unleash a wave of new import duties on America’s three closest trading partners — Mexico, Canada and China.
Although tariffs are a bane to most economists, they are a widely used as a tool for regulating international trade and for shielding domestic industries from foreign competition. At the simplest level, tariffs are taxes placed on goods made overseas that are imported into the country. Notably, foreign companies aren’t responsible for paying the duties. Instead, U.S. businesses directly pay the tariffs on their imported goods to the federal government, according to the Tax Foundation, a tax-focused think tank.
Because American businesses are on the hook for paying the tariffs on imports, they historically have passed on some or all of those costs to consumers. At the same time, tariff proponents like Mr. Trump argue that such levies can help protect manufacturers here at home. For instance, consumers may opt to buy U.S.-made products rather than newly pricier imports, while companies may choose to avoid tariffs by opening new plants in the U.S.
“Come make your product in America,” Mr. Trump said last week at the annual World Economic Forum gathering in Davos, Switzerland. “But if you don’t make your product in America, which is your prerogative, then very simply you will have to pay a tariff.”
Many economists and other trade experts say tariffs are not beneficial. The Peterson Institute for International Economics points out that tariffs “have a poor record” of sparking a resurgence in manufacturing.
On Friday, White House spokeswoman Karoline Leavitt said Mr. Trump on Saturday will imposed 25% tariffs on imports from Mexico, 25% tariffs on Canadian imports and an additional 10% tariff on Chinese goods entering the U.S. She cited “illegal fentanyl they have sourced and allowed to distribute into our country” as the reason for the tariffs.
Mr. Trump has also floated the possibility of additional tariffs, such as an across-the-board duty of 10% on all goods imported into the U.S. Here’s what to know about tariffs.
What exactly are tariffs?
Tariffs are duties paid on goods imported into the U.S..
The most common type are ad valorem tariffs (Latin for “according to the value, which represent a fixed percentage tax on the value of the imports. These are the tariffs Mr. Trump is proposing in putting a 25% import tax on goods shipped from Mexico or Canada, such as avocados or lumber.
There are also “specific” tariffs, which are levied as a fixed charge per unit, such as if the U.S. were to propose a $1 tariff on each imported Mexican avocado.
Another such type of levy are “tariff-rate quotas,” which are taxes triggered by reaching a specific import threshold. For instance, this type of quota was used by the first Trump administration in 2018 on washing machines, when the first 1.2 million imported units faced a 20% duty, while units above that number were taxed at a 50% rate, according to the Coalition for a Prosperous America, which advocates for more restrictive trade policies.
Who pays for tariffs?
Companies that import the goods from abroad pay the tariffs to their own nation. The U.S. Customs and Border Protection collects tariffs from importers — say, Walmart or Target — and then deposits the money into the General Fund of the United States.
Mr. Trump has claimed that foreign countries pay the duties. As part of his campaign, he vowed that tariffs would help raise “trillions and trillions of dollars” from foreign governments.
In fact, American consumers would likely bear the brunt of the cost, as big U.S. importers are likely to pass on the tariffs they pay to the customs department to consumers, economists say. In some cases, foreign manufacturers may also chose to lower their prices to offset the impact of those tariffs in order to maintain their sales. And some U.S. businesses could absorb some of the tariff costs to avoid driving away consumers and potentially losing market share to competitors.
If Mr. Trump enacts all the tariffs he’s vowed to levy on imports, the typical U.S. consumer could face up to $2,400 in increased costs for every year the tariffs remain in force, according to an estimate from financial services firm ING.
Could tariffs boost inflation?
If fully enacted, Mr. Trump’s tariffs would sharply push the current effective U.S. tariff rate from 2.4% to 31%. That would be a historic high and surpass those seen under President McKinley in the 1890s, when U.S. trade policies were far more protectionist, and during the 1930s under the Smoot-Hawley Tariff Act, according to Capital Economics.
As a result, inflation would likely jump, rising from an annual rate of about 2.9% currently to as high as 4%, or about double the Federal Reserve’s 2% target, Capital Economics noted. That would put inflation back to its mid-2023 levels, when the Fed was keeping interest rates near a two-decade as it tried bring inflation under control.
“[I]mposing any of these suggested tariffs would generate a rebound in consumer price inflation this year, taking it further above target and making it harder for the Fed to resume loosening monetary policy,” Capital Economics said in a Jan. 28 report.
Why does Trump support tariffs?
President Trump cites tariffs as a way to accomplish several policy goals, including raising more money to fund the government and protecting domestic industries.
Both he and his allies, including his new Treasury Secretary, Scott Bessent, contend that tariffs enacted during the first Trump administration didn’t boost inflation. But those tariffs, which applied to only some Chinese imports, “were too small to matter” and so didn’t have an inflationary impact, Capital Economics said in its research note.
Mr. Trump has also cited the need to boost U.S. manufacturing, saying in an October interview at the Economic Club of Chicago, “No. 1 is for protection of the companies that we have here, and the new companies that will move in because we’re going to have thousands of companies coming into this country.”
The data to support to that claim is mixed. The tariffs Mr. Trump imposed in 2018-19 achieved that goal to some extent, with the Brookings Institution noting that jobs in a few industries may have rebounded, such as adding 1,800 new U.S. jobs at Whirlpool and other washing machine manufacturers.
Overall, the number of U.S. manufacturing jobs fell slightly during Trump’s first term, from about 12.4 million to 12.2 million workers. A range of factors could account for that decline, such as the impact of the pandemic and broader economic issues facing manufacturing.
