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How do tariffs work?

BACKGROUNDER | A brief history of U.S. import taxation


International container ships sit docked at the Port of Oakland in California. Justin Sullivan / Getty Images

How do tariffs work?
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President Donald Trump has called tariff “the most beautiful word in the dictionary.” On Feb. 10 he signed proclamations imposing 25% tariffs on all steel and aluminum imports beginning in March. Since taking office, Trump has threatened Canada and Mexico with 25% import duties and imposed new tariffs on Chinese goods. That prompted China to institute retaliatory tariffs on U.S. products—signaling the start of perhaps the first trade war of Trump’s second term.

What is a tariff, anyway? It’s essentially a tax, either a fixed amount or a per­centage of a good’s value, on imported products. The effect is to make the taxed products less competitive than domestic goods. A tariff can be applied to specific goods or to a broad category such as solar panels, cellphones, or electronic components.

Who authorizes U.S. tariffs? The Constitution gives Congress power “to regulate commerce with foreign nations.” Congress establishes tariffs, but the legislative branch has given the president authority to adjust tariffs to address national security concerns, threats to U.S. industry, or unfair trade practices.

Who pays for them? The company importing the goods pays as products enter the country, and the increased costs are typically passed on to the consumer through higher prices. If imports decline, other currencies can weaken compared with the U.S. dollar, making imported goods more expensive.

Are tariffs new? Congress began imposing tariffs in 1789 to fund the new government and protect American manufacturers. Historians estimate tariffs provided about 95% of the federal government’s early revenues. Tariffs largely fell out of favor beginning in the 1930s, and their use declined steeply after World War II as income-tax revenue grew, American manufacturing rose, and the U.S. promoted free trade globally. Trump revived tariffs as a means for political pressure during his first term.

What imports did the United States already tax before Trump’s latest tariffs? As of January, half of industrial (nonagricultural) goods entered the United States without any tariff, and the remainder had an average tariff rate of 2%, according to the Office of the U.S. Trade Representative. (The rate can vary significantly from product to product.) “Industrial goods” constitute the vast majority of imports and include such items as machinery, autos, minerals, metals, clothing, and fish.

What are the goals of Trump’s tariff threats? During his campaign, Trump proposed 10-20% across-the-board tariffs as a way of bringing manufacturing back to the U.S. His recent tariffs and tariff threats targeting goods made in China, Canada, and Mexico are meant to address trade deficits and protect U.S. companies, but Trump also hopes these countries will do more to stop the flow of illegal drugs and migrants.

What are the economic downsides to a tariff war? Governments in targeted countries typically impose their own tariffs on U.S. goods or restrict exports of goods needed by American manufacturers. Companies in those countries may over time move some of their operations or portions of their assembly lines to other countries to avoid tariffs. The tariffs also drive up costs for domestic companies when their finished products contain parts made or assembled in other countries. Trade wars overall produce uncertainty for manufacturers, buyers, and investors that can be a drag on production and financial markets.

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