A tariff is a tax on imported goods usually aimed at protecting local jobs and industries from foreign competition. The idea is that if foreign materials and products are more expensive, you’ll buy more domestic goods.Suppose, for example, that the U.S. government levied a new 10% tariff on cars imported from Japan. The tariff would push the price of a $50,000 Japanese vehicle to $55,000. So, because the Japanese car is now more expensive, in theory, a similar American-made vehicle becomes more appealing to buyers.President Donald Trump introduced tariffs on about $380 billion worth of goods during his first term in 2018 and 2019, breaking with decades of free trade policy. Just weeks into his second term, he threatened 25% tariffs on Canada and Mexico — but quickly hit pause — and a 10% tariff on Chinese imports. Canadian oil faces a lower 10% duty.Not sure how tariffs work or where you stand on the issue? We’ll walk you through how tariffs work, why governments impose them, and how they affect you.Most countries have tariffs of some sort, and the reasons for imposing them vary widely. Let’s look at some common reasons countries enact tariffs.Like any other taxes, tariffs provide income for the government that levies them. In fact, tariffs were the primary source of revenue for the U.S. government during its early days until the federal income tax was established in the early 20th century.Today, tariffs are a minuscule source of income for many developed countries like the U.S. and European Union nations. In the U.S., for instance, tariffs accounted for less than 2% of the federal government’s revenue in 2023.Poorer countries often have far higher tariff rates than wealthier countries because their governments depend on them for revenue. For instance, Djibouti, The Gambia, and Belize all had average tariff rates above 17% as of 2021, compared to 1.5% for the U.S.For developed nations, tariffs — also known as customs duties or import duties — tend to be protectionist. That is, they’re intended to give a price advantage to domestic goods, shielding a country’s businesses and workers from cheaper foreign competition. For example, Congress passed a sweeping range of tariff hikes, some as high as 60%, after the stock market crash of 1929 under the Smoot-Hawley Tariff Act to protect the farming industry.A government may implement tariffs to avoid relying too heavily on different countries for goods deemed critical to security, like military supplies.For example, Trump cited national security concerns when he hiked tariffs on steel and aluminum because both are used for weaponry and military equipment. Though Congress is typically tasked with levying tariffs and taxes, the president has the authority to enact them unilaterally in the name of defense.The World Trade Organization (WTO) largely supports free trade policies, but it allows countries to enact trade barriers like tariffs in response to human rights concerns. Tariffs can al
Mar. Feb 4th, 2025
