Tariffs have been part of American economic history from the country's origins and have long been a subject of debate. But what is a tariff exactly and how does it work? Ahead, we'll explore the intricacies and potential impacts of tariffs, including:
- Who pays for a tarrif?
- Why do governments impose tariffs
- History of tariffs
- How tariffs impact the economy
What is a tariff?
A tariff is a tax on imports. It's typically charged as a percentage of the price a buyer pays a foreign seller for an imported product, and it's paid by the importer—usually a domestic company—to the customs authority. In the United States, tariffs on incoming products are collected by U.S. Customs and Border Protection, which manages more than 300 ports of entry across the country.
Who pays for the tariff?
The importer pays the tariff when bringing goods into the country. That cost is typically passed on to consumers in the form of higher prices.
For example, if the U.S. imposes a tariff on Chinese-made televisions, a U.S. importer pays the duty to U.S. Customs and Border Protection. The Chinese government doesn't pay anything. In other words, the importing company, not the exporting country, pays the tariff.
Why do governments impose tariffs?
Enacting tariffs or raising tariff rates are a way for governments to raise revenue, protect domestic industries, and/or gain political leverage over trading partners.
Tariffs are a tool of protectionist trade policy, used to defend certain domestic industries against foreign competition. By imposing a tariff, the government aims to raise the cost of imported goods, thereby discouraging their consumption and encouraging production of domestic goods instead.
In theory, a tariff on imported goods supports the domestic industry by making local products relatively cheaper and therefore potentially more appealing in comparison to foreign products. However, if consumers still buy imported goods, the tariff has effectively just raised the cost of the good. In some cases, companies might find it's more cost-effective to absorb the cost of tariffs and continue producing abroad.
History of tariffs
Before the federal income tax was established in 1913, tariffs were a major source of government revenue.
The chief goals of the Tariff Act of 1789, which imposed a flat 5% tax on all imports, were to protect a growing American manufacturing sector from foreign competition and raise money for the new government. In the first half of the 19th century, after the Tariff Act was passed, tariffs accounted for approximately 90% of federal revenue.
The McKinley Act of 1890 raised tariff rates to nearly 50% on many products. It proved unpopular, and the Revenue Act of 1894 lowered the rates, only to see them raised again with the Dingley Act of 1897. During William McKinley's presidency from 1897 to 1901, the tariff rate on imports reached 29%.
Higher tariffs generally fell out of favor in the 20th century as the federal income tax became a bigger source of revenue, and governments rallied more around free-trade policies. One exception was the 1930 Smoot-Hawley Tariff Act, which imposed a 25% tariff on a broad range of goods. Several foreign countries responded with reciprocal tariffs on American exports; within a few years, global trade dropped by 60%, which many economists believe likely worsened the Great Depression. After World War II, international trade was seen as critical to helping rebuild economies. The General Agreement on Tariffs and Trade, a multilateral trade agreement signed in 1947 to reduce trade barriers, was a precursor to the World Trade Organization (WTO), established in 1994.
Tariffs in recent history
President Donald Trump's tariffs policy in his first term targeted products such as solar panels, washing machines, steel, and aluminum. Former President Joe Biden kept many tariffs in place, even increasing them on certain goods such as Chinese electric vehicles and Canadian lumber. As a result, more tax revenue was collected from tariffs under Biden than in Trump's first term.
In April 2025, the Trump administration imposed a 10% baseline tariff on all imports. A trade standoff with China saw U.S. tariffs on imports from China rise to 145% in April, but after progress was made on initial talks in early May, the president reduced the tariff to 30%, with exceptions for smartphones and other electronics. As of May 19th, rates with Mexico and Canada were higher due to hot-button national security issues such as the fentanyl trade and migrant crossings at the border.
How do tariffs impact the economy?
Tariffs and trade barriers risk hurting all parties to at least some degree, particularly if relations devolve into a trade war where other countries impose retaliatory tariffs on U.S. imports.
Tariffs may raise prices of certain goods for U.S. consumers, who already had to adapt to a period of high inflation during the COVID-19 pandemic, or cut into profits for businesses that don't pass on the tariff to customers via price increases. Industries that rely on imports or global supply chains, such as manufacturing and consumer goods, may be harder hit. Higher prices might lower consumer demand, which could slow economic growth. Or foreign companies might cut prices to offset U.S. tariffs and remain competitive.
What should investors consider in light of tariffs and trade disputes?
Navigating a tariff-driven environment is difficult because policy decisions are often unpredictable. However, if you want to potentially buffer your portfolio from the ups and downs, you could consider stocks in companies with more domestic sales exposure, such as those in the utilities and communication services sectors. Alternately, some international diversification could reduce the effects. But if you're an investor with a long-term investment horizon, it may be best to stick to your plan and filter out the tariff noise.
Bottom line on tariffs
It's always difficult to predict how a tariff-related situation will play out, but one thing that's almost certain is that market volatility will continue. This is a challenging market backdrop to navigate, so stay disciplined around long-term goals and strategies.
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