Note: An earlier version of this article was published as part of a series of trade policy FAQs in 2019.
Tariffs have been in the news a lot lately. It’s too soon to tell if President Donald Trump’s assertions that he will implement broad tariffs will come to pass, or how exactly that would happen.
Either way, it is important to understand what tariffs are.
Tariffs are one of the core issues that are addressed in international trade agreements, such as the agreements governed by the World Trade Organization (WTO), or the bilateral and regional agreements, like the U.S.-Mexico-Canada Agreement (USMCA), which replaced NAFTA, the North American Free Trade Agreement.
Tariffs are a policy that governments can set unilaterally, too, as President Trump proposes to do. But where tariffs are part of trade agreements, the understanding is that goods and services will move more easily (and cheaply) if both sides of the exchange — the importer and the exporter — agree in advance what the tariff level should be and abide by the outcome.
The risk of breaking the agreement to raise tariffs above the agreed levels is that trade partners will respond in kind. This happened in 2017, when China imposed tariffs on U.S. soybean imports in response to President Trump’s unilateral imposition of tariffs on Chinese steel imports.
Still, it is hard to defend trade agreements despite the value of building economic relationships among countries. The last 30 years of trade agreements have ignored or actively undermined vital public goods, including the need to protect human rights, keep climate change within manageable limits, and promote more equitable economic outcomes among and within countries. Better trade agreements would promote shared public policy objectives, including higher labor standards and cleaner production systems, while regulating rather than privileging private foreign investors.
What is a tariff?
A tariff is a tax on goods and services imported into a country. It is collected by the importing government. In the U.S., it is collected by the Customs and Border Protection agency.
Who pays for tariffs?
Tariffs are paid by the importing country firm, as a tax added to the cost of the input or final good being imported. It can be charged on a final product (such as a car) or on an input in the supply chain (such as an auto part used to produce a car). The exporting country's government does not pay the tariff.
How do importer country firms make up for the cost of paying tariffs?
The impact of tariffs on prices will depend on several factors, including the availability of domestically produced alternatives and where in the supply chain the tariff occurs. A tariff on a final product, such as an avocado, will likely be more noticeable than a tariff on a component of a finished product. It’s possible that the exporting company would lower its prices to compensate the importing firm for the price impact of tariffs. Otherwise, the cost of the tariff will be passed along to others in the importer’s supply chain in some way, potentially including consumers.
If the tariff successfully stimulates local production to replace imports, local job creation and other economic benefits can arise. This is most likely to happen when specific tariffs are coupled with policies and support to strengthen the targeted sector. General tariffs on all goods are more likely to be passed on to consumers generally.
Why do countries use tariffs?
Tariffs are mainly used to protect domestic producers from competition with imports. Some governments also use them to generate revenues for the public budget. By making imports more expensive, the prices domestic producers charge may become competitive. Tariffs can also compensate for imports that are priced below their true cost of production, which the exporter uses to gain competitive advantage. IATP has documented the extent of dumping of U.S. farm goods in its export markets for many years.
Countries may also set tariffs to shelter new or strategic industries from competition as they develop. For example, as part of its industrialization program, South Korea set high tariffs on imports of many industrial goods until the government determined that its companies were ready to compete in global markets. The United States and other developed countries pursued similar strategies earlier in their history.
Targeted tariffs can be important elements of comprehensive economic strategies, including in agriculture. Canada’s use of dairy tariffs provides an example of how specific tariffs can be used to shelter broader efforts to support domestic production. In that case, the use of tariffs supports the administration of a dairy supply management program that balances domestic supply and demand at prices that support Canadian farmers’ livelihoods. The program also encourages more environmentally sustainable production and fair prices for consumers. Without the tariffs, that program would likely collapse under a flood of cheaper dairy imports produced without those goals. U.S. farm groups including the National Family Farm Coalition, Wisconsin Farmers Union and the United Food and Commercial Workers Union have supported this program in the face of trade disputes brought by the U.S. against Canada. They argue that such a system is a better model that the U.S. should learn from rather than seek to dismantle.
Tariffs can also be used to temporarily manage price shocks. A coalition of developing countries has argued for many years for the right to establish a Special Safeguard Mechanism at the World Trade Organization (WTO) to achieve food security and sustainable development and to enhance rural livelihoods. This would take the form of a variable tariff on key agricultural goods that would protect local producers from sudden drops in prices or floods of imports. The U.S. has vigorously opposed that idea since the 1990s.
How are tariffs usually set?
Tariffs are set by the importing country government and can be set as a percentage of the value of an imported item or by its volume or weight.
Countries may also set quotas (restricting the volume of imports of a good) or Tariff Rate Quotas, in which tariffs are set up to a certain volume of imports, usually with higher tariffs charged when the volume exceeds the quota. For example, the U.S. imposes Tariff Rate Quotas on imports of sugar, which sets a maximum volume of imports from eligible countries each year.
Trade agreements place limits on the imposition of tariffs. Under rules at the WTO, bound rates are the maximum tariff a government can set on each item. The applied rate is what they charge in practice. Under WTO rules, members may adjust their applied tariff rates, but only on a non-discriminatory basis. Developing countries have tended to maintain higher bound rates, although in practice many apply lower rates. For example, Mexico’s bound rate for corn is 37%, so it has the right to charge up to 37% on imports. The applied rate it charges in practice is 4%. As of 2023, the U.S. trade weighted average applied tariff on agricultural imports was 4%, and 2.1% on other goods.
WTO members also agree to Most Favored Nation status, which means that lower tariffs or other trade benefits offered to one country must be extended to other WTO members. If a country enters into a separate free trade agreement with one or more countries, it can only agree to tariffs at or below the limits agreed to at the WTO, and the agreement must substantially cover all trade.
Free Trade Agreements like the USMCA generally aim to eliminate tariffs (as well as setting rules on many other areas of economic activity) among member countries, with certain exceptions. In the case of NAFTA, for example, Mexico agreed to phase out its tariffs on corn imports from the U.S. In that case, the flood of cheap U.S. corn exports led to millions of Mexican farmers being pushed out of agriculture.
How can the United States charge higher tariffs?
Rules at the WTO and other free trade agreements allow for some flexibility for member states to address unfair trade practices and to allow domestic industries to adjust to sudden surges in imports under certain circumstances (each with specific sets of rules). These include exceptions when a country’s national security is threatened. The idea is that, for example, during a time of war, a country might need to reduce its reliance on specific imported goods and build up local capacity. That justification is a kind of wild card that suspends the rules at the WTO or other trade agreements.
In the U.S., Section 232 of the Trade Expansion Act of 1962 establishes a process to assess the national security impacts of imports and to impose temporary tariffs. In 2018, using Section 232, the U.S. Commerce Department ruled that global overproduction of steel resulted in low prices that threatened U.S. steel production. Furthermore, they deemed U.S. steel production as essential to national security. President Trump imposed 25% tariffs on imports of steel and 10% on aluminum from many countries.
These tariffs were continued with some changes under the Biden administration, which also announced tariffs on goods from China in 2024 as the result of an investigation of intellectual property rights violations under Section 301 of the Trade Act of 1974. That provision permits tariffs in cases of discriminatory or unjustifiable practices by a trading partner.
In 2024, President Trump announced plans to raise tariffs on all goods to 10%, 25% for goods from Mexico and Canada and 60% on goods from China. He signed an Executive Order on “America First Trade Policy” on his first day in office that establishes a series of formal trade reviews to be completed by April 2025. Those reviews could result in tariffs. He also commented to reporters that he might raise tariffs on some or all goods from Mexico and Canada on Feb. 1, well before the formal trade reviews are completed.
The arbitrary use of tariffs risks retaliation from trading partners. When Trump imposed tariffs on steel and other goods during his first administration, China raised tariffs on U.S. farm goods. U.S. exports on corn and soy were suddenly priced out of that market. The administration paid out $28 billion to farmers from the Commodity Credit Corporation. That compensation helped the agricultural sector to survive the turmoil, but the volatility likely contributed to further corporate concentration in agriculture. China also diversified its sources of grain imports to other countries.
Can the president legally set tariffs?
The U.S. Constitution gives Congress the authority to set tariffs. Congress has partially delegated that power to the president to change tariffs under certain circumstances in various laws. The International Emergency Economic Powers Act of 1977, for example, gives the president authority to set tariffs on another country during a national emergency. Congress could pass new laws to take back that authority, starting with pushing for new efforts to work with other countries to press for reforms of unfair trade practices.
Tariffs are a tool, like other forms of taxation. Whether they serve to encourage sustainable local production and livelihoods or simply raise prices depends on how they are designed and if they are part of a broader economic strategy, including more substantial changes in trade policy and trade agreements. That is the conversation we should be having now.
