What Is a Tariff? Definition, Examples, and Impact on Trade

Average US tariff rate on all imports (2023): 2.5% ·
US tariff revenue in fiscal year 2023: $77 billion ·
Number of countries subject to US tariffs: 126 ·
Highest US tariff rate (on tobacco): 350%

Snapshot facts. Four key data points frame the tariff debate.

What is a tariff in simple terms?

Definition of a tariff

• A tariff is a tax levied on goods crossing national boundaries, usually by the importing country (Britannica (reference encyclopedia)).
• Governments impose tariffs to increase the cost of foreign products and protect domestic industries (Finance Strategists (financial education platform)).

Think of a tariff as a border toll. An American company importing German steel must pay a percentage of the steel’s value to U.S. Customs. That extra cost often shows up as a higher price tag on products made with that steel – cars, appliances, construction materials.

Tariff vs tax vs duty

• Tariffs are a specific type of tax: a customs duty on imports (Britannica).
• Export duties are rare; the U.S. Constitution prohibits them (Macro GM Securities (financial commentary)).

The terms “tariff” and “duty” are often used interchangeably, but “tariff” usually refers to a schedule of duties on a list of products.

The catch: the cost of protection is paid by consumers who never voted on the tariff.

What is a tariff and why is it important?

Revenue generation

• The U.S. collected $77 billion in tariff revenue in FY2023 (US Customs and Border Protection (government agency)).
• Before the income tax (1913), tariffs funded the federal government (Davron (trade commentary)).

Protection of domestic industries

• Tariffs shield local businesses from foreign competition by raising import costs (Finance Strategists (financial education platform)).
• Alexander Hamilton’s 19th-century tariffs protected U.S. steel, shipbuilding, and textiles from British competition (YouTube: Tariffs Explained (educational channel)).

Political leverage

• Tariffs are used as a bargaining chip in trade negotiations (Council on Foreign Relations (foreign policy think tank)).
• Retaliatory tariffs – like those sparked by Smoot-Hawley in 1930 – can escalate into trade wars (Oxford Economics (economic research firm)).

The pattern: tariffs are a double-edged sword. They raise money and defend industries, but they also invite retaliation and raise costs for consumers.

Why does Trump want tariffs?

Trump’s trade war rationale

• Donald Trump argued tariffs protect American jobs and manufacturing (Council on Foreign Relations (foreign policy think tank)).
• He imposed 25% tariffs on steel and 10% on aluminum in 2018, plus up to 25% on $250 billion of Chinese goods (Macro GM Securities (financial commentary)).

Tariffs on China

• The Trump administration used tariffs to pressure China on intellectual property and forced technology transfer (Council on Foreign Relations (foreign policy think tank)).
• China retaliated with tariffs on U.S. soybeans, pork, and manufactured goods, hitting American farmers (Tax Foundation (nonpartisan tax policy think tank)).

Impact on manufacturing

• Steel tariffs did boost domestic capacity utilization but raised costs for downstream industries like auto and construction (Finance Strategists).
• The long-term effects on manufacturing employment remain disputed (Oxford Economics (economic research firm)).

The consequence: Trump’s tariffs reinforced the protectionist turn in US trade policy, with uncertain long-term results.

Who pays for a tariff?

Importer pays the government

• The legal payer is the importer of record, who submits payment to customs at the port of entry (Britannica (reference encyclopedia)).
• The tariff is calculated as a percentage of the product’s value (ad valorem) or a fixed amount per unit (specific) (Finance Strategists (financial education platform)).

Who ultimately bears the cost: consumers

• Importers pass on most of the tariff cost to wholesalers, retailers, and finally shoppers (Tax Foundation (nonpartisan tax policy think tank)).
• Studies show tariffs are essentially a regressive consumption tax – lower-income households spend a larger share of income on tariff-affected goods (Oxford Economics (economic research firm)).

Tariff incidence

• Economists call this “tariff incidence.” The actual burden depends on how sensitive demand is to price changes (Britannica).
• Domestic producers often raise their own prices to match the higher import price, so consumers may pay more even for local goods (Finance Strategists).

The catch: the importer writes the check, but everyone at the checkout counter eventually chips in.

Are tariffs good for a country?

Arguments in favor of tariffs

• Protect infant industries from established foreign competitors – used by the U.S. in the 19th century and by developing nations today (Davron (trade commentary)).
• Generate government revenue without raising income taxes (Congressional Budget Office (US gov fiscal authority)).
• Can be used to retaliate against unfair trade practices (Council on Foreign Relations (foreign policy think tank)).

Arguments against tariffs

• Trigger retaliatory tariffs that hurt exporters – as seen after Smoot-Hawley, when global trade fell 66% (Macro GM Securities (financial commentary)).
• Raise consumer prices and reduce purchasing power (Tax Foundation (nonpartisan tax policy think tank)).
• Protect inefficient domestic industries, stifling innovation (Finance Strategists (financial education platform)).

Historical examples

• The U.S. Tariff of Abominations (1828) sparked the Nullification Crisis, nearly tearing the Union apart (Macro GM Securities (financial commentary)).
• Smoot-Hawley (1930) deepened the Great Depression – U.S. exports fell over 60% from 1929–1934 (Macro GM Securities).
• British Corn Laws (1815–1846) protected landowners but raised food prices for the working class (Macro GM Securities).

The bottom line: tariffs are a trade-off between short-term protection and long-term competitiveness.

“Tariffs are a tool of trade policy, often used to protect domestic industries or as leverage in negotiations.”

— Council on Foreign Relations (foreign policy think tank)

“Tariffs are often called ‘a tax on consumers’ because the cost is ultimately passed down the supply chain.”

— Tax Foundation (nonpartisan tax policy think tank)

Tariffs are neither inherently good nor evil. They are a policy tool with real trade-offs. The same tariff that saves a steel mill job can raise the price of a refrigerator by $150 and invite a trade war that hurts farmers.

For American shoppers, the implication is clear: every tariff on a consumer good is effectively a hidden sales tax – one that disproportionately hits lower-income households. For policymakers, the choice is between short-term protection and long-term competitiveness.

Frequently asked questions

Related reading: Register for GST NZ – Step-by-Step myIR Guide · ANZ Australia Receiving Money From Overseas – Process Explained