You can’t flip on the news or click through social media without hearing about tariffs. And while everyone thinks they know something about tariffs, how they actually work can be challenging to figure out—that’s because they are often a moving target. Here’s what you need to know.
A tariff is a tax on imports. A country typically imposes tariffs to make money or protect certain industries from competition—sometimes, both. The idea is that tariffs make it more expensive to use foreign goods. In theory, this should mean a decline in imports (making those goods more expensive) and an uptick in the use of domestic goods (assuming that the goods are manufactured or available at home).
The amounts have changed since Trump first proposed them, but currently, the plan is to impose 25% tariffs on Canada and Mexico and a 10% tax on imports from China. (A reduced tariff of 10% would apply to Canadian energy imports.)
The 25% tariff on Canada was slated to begin on February 4, 2025, but on February 3, Canadian Prime Minister Trudeau agreed to a 30-day pause.
The 25% tariff on Mexico was also scheduled to start on February 4, 2025, but it was delayed by one month after the two countries reached a deal. Mexico President Claudia Sheinbaum Pardo has agreed to send 10,000 troops to the U.S. border to stop drug trafficking, while Trump has agreed to take action to slow the number of American guns entering Mexico.
According to the Tax Foundation, the proposed tariffs would shrink economic output by 0.4% and increase taxes by $1.1 trillion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $800 per US household in 2025.
Economists predict that, due to U.S. tariffs, U.S. consumers will likely pay more for cars and car parts, as well as oil and natural gas. Food prices, including those on fresh fruits and vegetables (yes, including avocados), are also likely to be impacted. Beer and spirits prices could rise, too.
Canada has imposed retaliatory tariffs on U.S. products, including poultry and dairy products. You can see a list here.
As noted earlier, tariffs are used to raise money, protect domestic interests—or both.
We already have tariffs on some products—they amount to around 2.5%. The U.S. has been a member of the World Trade Organization (WTO) since 1995 and its predecessor, the General Agreement on Tariffs and Trade (GATT), since 1948. Under the WTO, countries generally agree to keep tariff costs within certain limits or targets (which vary by country) to promote free trade.
President Trump has said that the tariffs will be paid for by foreign countries.
In practice, tariffs are paid by the importers. In the U.S., that tends to be companies that buy those products (in some cases, raw materials like lumber). Those costs tend to be passed on to consumers since they increase the cost of doing business. The result? Higher prices at stores and at the pump.
On January 14, 2025, President Trump announced on Truth Social that he would create a new federal agency, the External Revenue Service, “to collect our Tariffs, Duties, and all Revenue that come from Foreign sources.” He said that January 20, 2025, would “be the birth date of the External Revenue Service.”
(Typically, creating a new federal agency requires Congressional approval.)
In the U.S., there is already a system for collecting tariffs. Customs and Border Protection (CBP) agents perform that task at ports of entry. The division was created in 2003 but has existed in other forms for over 100 years. The Division of Customs was created in the Treasury Department in 1875. It was consolidated with the Special Agency Service of the Treasury Department in 1927. The Customs Bureau was renamed the U.S. Customs Service in 1973 and eventually recast as the CBP.
In response, Sen. Ron Wyden (D-Ore.) said in a statement, “No amount of silly rebranding will hide the fact that Trump is planning a multi-trillion-dollar tax hike on American families and small businesses to pay for another round of tax handouts to the rich.”
In the U.S., the first tariff levied by our government (meaning outside of those nasty British tariffs) was adopted in 1789. The not-so-cleverly named Tariff Act of 1789 had, as its primary goals, exactly the reasons stated earlier: money and protectionism. It was spelled out as such in the Act, saying:
Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise…
Today, tariffs are typically characterized as a specific duty or an ad valorem duty.
A specific duty is a fixed amount of money that does not vary with the price of the goods. An example of a specific duty would be a tax of $10 per pound of sugar. In 1789, those specific duties were imposed on 36 goods, including beer, wine, spirits, molasses, salt, sugar, tobacco, tea, and coffee. If that sounds like mostly good stuff, you’re right. It was considered a luxury tax aimed at the wealthy.
An ad valorem duty—the most common kind of tariff in the modern era—is a fixed percentage charged of the value of the goods. Ad valorem is Latin (remember, lawyers love Latin) for “according to the value.” An example of a specific ad valorem duty would be a tax of 20% on the value of cotton. In 1789, the ad valorem duties of 5-15% were imposed on most imports not otherwise excluded from tax and included china, stone, and glassware. This is the kind of tariffs that Trump has instituted.
(Some goods are exempt from tariffs in certain circumstances. You’ve likely seen a type of this treatment in the international airport—those “duty-free” stores.)
For years, the U.S. relied on tariffs to fund the government. The modern income tax system was made official in 1913, though the U.S. tried to collect income taxes intermittently, depending on need, beginning in about 1860 (notably, to pay for the Civil War). Before that time, tariffs accounted for most of the federal revenue.
As of March 2024, the so-called “trade war tariffs” under Biden and Trump (in Trump’s first term, he imposed tariffs that Biden extended) generated more than $233 billion. About 38% was collected during the Trump administration, while the remaining 62% was collected during the Biden administration.
Not always as intended. Noted American economist Frank Taussig found hardly any advantage in the early use of tariffs, saying, “Little, if anything, was gained by the protection.”
Not gaining anything is one thing, but losing something is quite another. The Tariff Act of 1930, known as the Smoot-Hawley Tariff, increased tariffs at unprecedented rates. The bill, signed into law by President Herbert Hoover over the protests of nearly 1,000 economists, pushed rates up for nearly 900 American duties. The act was meant to protect the U.S. economy and encourage domestic spending. The result, however, was a stake through the heart of global trade: European countries struck back with their own tariffs. The resulting trade war is considered one of the factors that led to the Great Depression.
(Note: Updated to reflect 30-day pause on tariffs on Canadian imports.)
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