What is a tariff? How tariffs work and who pays

A tariff is a tax a government charges on goods brought into the country from abroad. It is collected at the border, and the company importing the goods pays it, not the foreign country that made them. What happens next is the real question: the importer can absorb the cost, pass it on to shoppers in higher prices, or push the foreign seller to cut its price.

In short

• A tariff is a tax on imports, paid by the importer to its own government when the goods arrive.
• Who ends up bearing the cost depends on who can pass it along; studies of the 2018 US tariffs found it fell almost entirely on American buyers.
• Countries use tariffs to raise money, protect home industries and bargain, and the usual price is higher costs at home and retaliation abroad.

How does a tariff work?

Most tariffs are a percentage of the goods' value, called an ad valorem tariff. A 25% tariff on a $10,000 shipment of bicycles means the importer owes $2,500 before the bicycles can leave the port. In the United States, that money goes to U.S. Customs and Border Protection and then to the Treasury. Some tariffs are instead a fixed amount per unit, such as a set charge per kilogram or per car.

Kind	How it's charged	Example
Ad valorem	A percentage of the goods' value	25% of the price of imported steel
Specific	A fixed sum per unit	A set amount per kilogram of cheese
Tariff-rate quota	A low rate up to a set quantity, a high rate above it	Low duty on the first tonnes of sugar each year

Every country publishes a schedule of its rates, product by product, which runs to thousands of lines. Members of the World Trade Organization also promise ceilings, called bound rates, that they won't raise their tariffs above, as the WTO explains. The rate a country actually charges can be lower than its ceiling.

Who actually pays a tariff?

The importer writes the check, but that settles only who pays first. Who bears the cost depends on who can pass it on. Here is one shipment worked through, with a 25% tariff on a bicycle that a foreign factory sells for $200 and a shop sells for $300.

Case	Factory price	Tariff paid	Importer's cost	Shop price
No tariff	$200	$0	$200	$300
Cost passed on in full	$200	$50	$250	$350
Cost shared	$180	$45	$225	$320

In the second row, the factory keeps its price and the shopper pays the whole $50. In the third, the factory cuts its price by $20 to keep the business, the importer takes $5 less margin, and the shopper pays $20 more: the $45 tariff split three ways. Which row the world looks like depends on how easily each side can walk away. A foreign maker with plenty of other customers won't cut its price. A shopper with a cheap domestic alternative won't pay more.

For the tariffs the United States put on steel, washing machines and Chinese goods in 2018, the evidence points to the second row. Economists Mary Amiti, Stephen Redding and David Weinstein found complete pass-through of the tariffs into the prices of imported goods, with the full cost falling on US buyers. Prices of goods made at home can rise too. A study of the 2018 washing machine tariffs found that washer prices rose about 12%, and so did dryers, which had no tariff, because sellers raised them together, as UChicago News reported in 2019.

Why do countries use tariffs?

Tariffs have four main jobs, and a single tariff often does more than one:

• Revenue. For most of the 19th century, customs duties were the US federal government's main source of money; the permanent federal income tax arrived only in 1913, with the 16th Amendment. Tariffs are easy to collect at a few ports, which is why many lower-income countries still rely on them.
• Protecting home industries. A tariff makes imports costlier, so domestic makers can charge more or sell more. Governments use them to shield young industries, to keep factories and jobs, or to answer foreign subsidies they see as unfair.
• Security. Countries protect industries they don't want to depend on others for, such as steel, chips or food.
• Bargaining. A tariff, or the threat of one, can be used to press another country to change its policies.

What a tariff costs is the other side of the same coin. Through supply and demand, a tax on imports raises prices for everyone who buys those goods, including companies that use imported parts to make things at home. A broad set of tariffs can add to inflation for a time. And the protected industry gains while the costs are spread thinly across millions of buyers, which is one reason tariffs are politically easier to start than to stop.

What happens in a trade war?

A trade war is when countries answer each other's tariffs with tariffs of their own. Exporters on both sides lose customers, and the industries that get hit are often different from the ones that were protected: a tariff on imported steel can bring a tariff on a country's farm exports.

The classic case is the Smoot-Hawley Tariff Act, which President Herbert Hoover signed on 17 June 1930. More than 1,000 economists had asked him to veto it. The average US tariff on goods that carried a duty rose from about 40% in 1929 to about 59% in 1932, according to Wikipedia's account of the act, partly because many duties were fixed sums that weighed more as prices fell. Canada, France, Italy, Spain and others retaliated. US imports from Europe fell from $1,334 million in 1929 to $390 million in 1932, and world trade fell by about two thirds between 1929 and 1934, the State Department's historians note. In 1934 Congress passed the Reciprocal Trade Agreements Act, which began decades of tariff cuts negotiated with other countries.

Still argued

How much Smoot-Hawley worsened the Great Depression is debated: most economists see it as a mistake that deepened the slump, while others, Milton Friedman among them, thought it a minor cause next to the collapse of the money supply. Arguments about tariffs today are sharper. Supporters say they protect strategic industries and jobs, counter subsidies abroad, and give a country leverage. Critics point to studies like those of 2018 showing the cost fell on domestic buyers, and to retaliation against exporters. The evidence is strongest on prices; effects on jobs and long-run industry are harder to measure. Tariffs came back to the center of US policy in 2018 and again in 2025; rates and court challenges have changed often since, so this note leaves them out.

Tariffs sit where politics meets economics, and they are a running subject at meetings of groups such as the G7 and BRICS.

Check yourself

• Who hands over the money when a tariff is charged, and why doesn't that settle who bears the cost?
• In the bicycle example, how did a $45 tariff split between the factory, the importer and the shopper?
• Why might a tariff on washing machines raise the price of dryers?

Sources

• Tariffs — World Trade Organization
• The Impact of the 2018 Trade War on U.S. Prices and Welfare — Amiti, Redding and Weinstein, NBER, 2019
• What washing machines can teach us about the cost of tariffs — UChicago News, 2019
• Protectionism in the Interwar Period — Office of the Historian, U.S. Department of State
• Smoot–Hawley Tariff Act — Wikipedia