Tariffs
Taxes on imports are always paid by someone — the question economists actually argue about is who, and the answer is almost never the foreign country.
The short version
- A tariff is a tax levied on imported goods at the border; it is collected by the importing country's government from importers, not from foreign governments or foreign companies — meaning the cost is borne domestically, by businesses and consumers in the country imposing the tariff.
- A landmark 2019 study by economists Amiti, Redding, and Zwick found that U.S. consumers and businesses bore nearly the full cost of Trump's 2018–2019 tariffs, with virtually no evidence that the tariffs were absorbed by foreign exporters — contradicting the central political claim made to justify them.
- Tariffs can serve legitimate economic purposes — protecting nascent industries, countering unfair subsidies, reducing strategic dependence on adversaries — but the empirical record of broad-based tariffs as a tool for reducing trade deficits or reviving domestic manufacturing employment is poor.
- The Smoot-Hawley Tariff of 1930, which raised average import duties to nearly 50%, triggered retaliatory tariffs from U.S. trading partners, contributed to a collapse in world trade, and is widely credited by economic historians with deepening and prolonging the Great Depression.
What it is
A tariff is a tax imposed by a government on goods imported from another country, collected at the point of entry. The basic mechanics: an importer pays a percentage of the declared value of goods (an ad valorem tariff) or a fixed dollar amount per unit (a specific tariff) to customs authorities when the goods enter the country. This tax increases the cost of importing the good, which typically results in some combination of higher prices for buyers, lower volumes of imports, and in some cases domestic producers expanding output to capture market share that becomes profitable at the higher price. The word comes from the Arabic 'ta'rif,' meaning notification or inventory — a term that traveled through medieval trade networks before settling into modern economic vocabulary.
Governments impose tariffs for a variety of reasons, which are worth distinguishing because they carry different empirical track records. Infant industry protection — shielding domestic producers from foreign competition long enough to develop economies of scale and technological competence — has historical precedents: the U.S. used protective tariffs heavily throughout the 19th century to develop its manufacturing sector, and South Korea and Japan used selective industrial protection in the 20th century. Countervailing duties target subsidized foreign imports that compete unfairly with domestic producers not because they are more efficient but because their government has artificially lowered their costs. National security tariffs — like those imposed under Section 232 of the Trade Expansion Act of 1962 — restrict imports of goods deemed essential to military readiness. Revenue tariffs, historically the main source of U.S. federal funding before the income tax, simply raise money. Retaliatory tariffs respond to trade barriers imposed by foreign countries. And broad-based tariffs, imposed across categories of goods from a particular country, are used to pressure trading partners, reduce trade deficits, or signal political grievances.
The claim that tariffs are paid by foreign countries is among the most frequently repeated and thoroughly refuted claims in economic policy. The mechanism by which tariffs operate makes the domestic incidence almost inevitable: the tariff is assessed on the importer, who must either absorb the cost in their margin or pass it to customers through higher prices. Whether foreign exporters reduce their prices to offset the tariff — thereby absorbing part of the cost — depends on the market power of the importer and the elasticity of demand. For most goods the U.S. imports from major trading partners, foreign exporters have alternative customers; they do not need to cut prices to maintain U.S. sales, because they can redirect exports elsewhere. The empirical research on the 2018–2019 tariffs found that U.S. import prices for tariffed goods rose by nearly the full amount of the tariff — meaning foreign exporters made little or no concession, and American buyers paid nearly the full cost.
Trade deficits — the gap between the value of what a country imports and what it exports — are the political motivation for many broad tariff proposals, but the relationship between tariffs and trade deficits is more complex than the political framing suggests. A trade deficit is mathematically equivalent to a capital account surplus: a country running a trade deficit is importing more goods than it exports, which means foreign entities are accumulating claims on domestic assets — buying U.S. stocks, bonds, and real estate. The U.S. runs a persistent trade deficit in goods partly because it runs a persistent capital account surplus — foreigners want to hold U.S. dollar-denominated assets, particularly U.S. Treasury securities, which are the world's premier safe asset. Tariffs that raise the price of imports may reduce the volume of specific imported goods but rarely reduce the overall trade deficit, because the macroeconomic forces driving the deficit — savings and investment rates, the dollar's reserve currency status — are not affected by tariff levels. Economists across ideological lines broadly agree on this; it is not a contested empirical claim.
Why it matters
The 2018–2019 tariff cycle under the Trump administration provided an unusually clean natural experiment in tariff economics. Beginning with Section 232 steel and aluminum tariffs in March 2018 and expanding through successive rounds targeting approximately $360 billion in Chinese goods, the tariffs generated extensive empirical research on their effects. The findings were consistent across independent analyses: U.S. consumers and downstream businesses paid most of the tariff cost; retaliatory tariffs from China, the EU, and Canada cost U.S. agricultural exporters billions of dollars in lost sales (requiring a $28 billion farm bailout to offset); and domestic manufacturing employment in tariff-protected industries saw modest gains that were largely offset by job losses in industries that use steel and aluminum as inputs. A Federal Reserve analysis found that the net employment effect on manufacturing was slightly negative.
Retaliatory dynamics are the mechanism through which tariffs most reliably harm the country that imposes them. When the U.S. imposes tariffs on imports from a trading partner, that partner typically responds in kind — targeting exports from politically sensitive U.S. industries. China's retaliation to Trump's 2018 tariffs specifically targeted American soybeans, pork, and agricultural products from politically important Midwestern states. The EU targeted Harley-Davidson motorcycles, bourbon whiskey, and Levi's jeans — goods associated with politically visible U.S. industries and regions. This targeting is not accidental: trading partners design retaliation to create domestic political pressure on the tariff-imposing government. The Smoot-Hawley Tariff of 1930 triggered retaliatory tariffs from over 25 countries; U.S. exports fell by more than 60% between 1929 and 1932, contributing directly to the collapse of farm income and banking failures across the rural United States.
The distributional consequences of broad tariffs are regressive in their consumer price effects: lower-income households spend a higher proportion of income on goods (as opposed to services), so price increases on imported goods — clothing, electronics, furniture, food — fall harder on them as a share of income. A 2019 study by economists at the Federal Reserve Bank of New York estimated that the average U.S. household paid approximately $831 per year in higher prices as a result of the 2018–2019 tariffs. The costs are diffuse and invisible — spread across thousands of transactions — while the benefits of tariff protection are concentrated in specific industries that can organize politically. This asymmetry explains why tariff politics consistently overweights the interests of protected industries against the broader consumer interest.
The macroeconomic consequences of sustained high tariffs depend heavily on scale and retaliation. Economists' concerns about the tariff increases proposed and implemented beginning in 2025 — which extended to much broader categories of goods and to more trading partners than the 2018–2019 cycle — center on supply chain disruption (many U.S. industries have multi-country supply chains that would be disrupted by simultaneously applied tariffs), inflationary pressure from import price increases passed through to consumers, retaliatory damage to U.S. agricultural and services exporters, and the risk that trading partners accelerate efforts to reduce dependence on U.S. markets and dollar-denominated trade — a long-run threat to the reserve currency status that allows the U.S. to borrow cheaply. The Peterson Institute for International Economics estimated that the tariff packages announced in early 2025 would reduce U.S. GDP by 1–2% and raise consumer prices by 2–3 percentage points over the following two years, though these projections carry significant uncertainty about retaliation scope and Federal Reserve response.