Tariffs 101: What You Should Know

President Donald Trump’s use of tariffs as a policy tool makes weekly headlines. However, because the U.S. has promoted free trade policies for many years, this topic may be relatively new for some people and sometimes misunderstood.

To help you monitor new developments and understand how they might affect you and your investments, we’ve created a basic guide on tariffs. It explains their purpose, implications and potential impacts.

What Are Tariffs? A Comprehensive Guide

Tariffs, or duties, are taxes on imported goods. The government that imposes them receives the revenue they generate.

Who Bears the Cost of Tariffs?

When goods from countries targeted by tariffs arrive at ports of entry, the importing firms pay the duties. In the U.S., for instance, a broker representing the importing company pays the duty to the U.S. Customs and Border Protection Service.

Who ultimately pays for the cost of tariffs is more complicated. The importer initially pays this tax directly. Then, the importer may increase customer prices to cover some or all of the tariff's costs.

Exporters don’t pay tariffs directly. If tariffs make their goods more expensive for prospective import buyers, exporters might lower their prices or cut production costs to compensate.

Why Do Countries Employ Tariffs?

Tariffs generally serve three purposes:

1. Raising revenue for countries that impose them.

2. Restricting imports and protecting domestic producers from foreign competition.

3. Pressuring other nations to reduce trade barriers.¹

Other reasons for imposing tariffs include protecting national security by reducing reliance on other nations for key goods and services. A country may also impose a tariff to retaliate for tariffs on its exported goods.

Trump supports tariffs to achieve several of these aims. According to Strategas Research, he aims to address trade imbalances and the U.S. trade deficit. He also seeks to advance policy goals such as interrupting the drug trade, immigration enforcement, increased military spending by members of the North Atlantic Trade Organization (NATO) and boosting exports of certain goods.

The U.S. has used tariffs since 1789. Before the Civil War, tariffs comprised 90% of the government’s revenue. This percentage dropped to less than a third by 1915 after the U.S. instituted a federal income tax. By 2016, tariffs accounted for less than 1% of revenue. Globally, tariffs contribute 3.5% to government revenue.²

As tariffs diminished, the U.S. economy became more integrated with international trade.

New tariffs imposed during Trump’s first administration have generated $233 billion in customs duties. Most of this amount was collected during the Biden administration, which kept Trump’s tariffs in place.³ Over six years, this revenue is only a fraction of the federal government’s 2025 expenses of $6.75 trillion.⁴

Do Tariffs Help Protect Jobs?

Tariff supporters and detractors often debate whether tariffs protect American jobs.

Supporters note that tariffs on imported steel and aluminum in Trump’s first term prompted some U.S. steel plants to reopen.⁵

Quotas restricting imports of Japanese cars in the 1980s initially increased the prices of these vehicles by 5% to 10%. However, they also led many Japanese carmakers to build plants and create jobs in the southern U.S.⁶

However, a 2024 working paper by economists at the Massachusetts Institute of Technology, University of Zurich, Harvard University and the World Bank concluded that Trump’s first-term tariffs “neither raised nor lowered U.S. employment.”⁷

Despite Trump’s 2018 tariffs on imported steel, for example, the number of jobs at U.S. steel plants hardly changed. Meanwhile, the retaliatory tariffs China and other nations imposed on U.S. goods had overall “negative employment impacts,’’ notably for farmers, according to the study.⁸

Similarly, a 2019 Federal Reserve (Fed) analysis found that Trump’s tariffs negatively impacted U.S. manufacturing jobs.⁹ Most recently, the nonpartisan Tax Foundation estimated that Trump’s latest tariffs would reduce U.S. employment by the equivalent of 142,000 full-time jobs.¹⁰

Do Tariffs Lead to Higher Inflation?

Economists almost unanimously agree that tariffs raise prices on the affected imported goods. Trump’s proposals have included a universal tariff applied to all goods from targeted countries. As a result, investors’ long-term expectations for broader inflation have increased since Trump’s election victory in November 2024.¹¹

Of course, consumers can seek cheaper alternatives to avoid paying higher prices for imported goods subject to tariffs. However, by limiting competition, tariffs also mean that prices for these alternative goods will likely rise.

The inflation impact of Trump’s first-term tariffs appears somewhat limited. In 2022, the Economic Policy Institute found that removing them would have offset just 7.2% of the rise in consumer prices the U.S. endured in 2021.¹² Furthermore, research conducted in 2019 found that retailers increased prices only marginally on products subject to tariffs, meaning they bore the brunt of the impact in the form of lower profit margins.¹³

The inflation impact of the 25% across-the-board tariffs on Canada and Mexico and 10% on China could be significant. These nations are the three largest U.S. trade partners, accounting for roughly one-third of all U.S. imports in 2024.¹⁴

How Do Tariffs Affect Consumers?

Both individuals and businesses typically face higher prices for imported goods subject to tariffs. The Federal Reserve Bank of New York found that Trump’s first-term tariffs cost U.S. consumers $1.4 billion monthly, as “the entire incidence of the tariffs fell on domestic consumers.”¹⁵

The Tax Foundation estimates the tariffs, which continued under the Biden administration, equated to an annual tax increase of $625 on U.S. households.¹⁶

By limiting competition, tariffs tend to reduce the quantities of goods and services available for U.S. businesses and consumers. They can also limit the variety and quality of products, reducing consumers’ options.

Some consumers may benefit from tariffs through jobs that materialize, or at least don’t disappear, in domestic industries they aim to protect. But these jobs can come at a high cost. Studies show that each job saved by Trump’s first-term tariffs on steel and foreign-made washing machines cost consumers and businesses an average of $815,000 and $900,000, respectively.¹⁷

Do Tariffs Affect the Economy?

Tariffs increase revenue for the government imposing them. Annual U.S. import taxes doubled to $74 billion between 2015-2020. However, because China retaliated by buying fewer U.S. agricultural goods, the U.S. provided $61 billion in taxpayer aid to U.S. farmers.¹⁸

At the same time, almost all economists agree that tariffs tend to limit economic growth. The Tax Foundation estimates the new tariffs on goods from Canada, Mexico and China may reduce U.S. economic output by 0.4% annually between 2025-2034.¹⁹

The Peterson Institute for International Economics has a similar forecast. The institute estimates that if the tariffs remain in place, they could reduce annual real gross domestic product (GDP) by 0.5% from now until 2040.²⁰ The Council on Foreign Relations projects the tariffs may cost the U.S. economy $1.4 trillion by 2028.²¹

The tariffs will likely reverberate globally. J.P. Morgan estimates foreign investors already pulled $19 billion in capital from emerging markets in the fourth quarter of 2024, with another $10 billion in outflows expected in this year’s first quarter.²²