What are Tariffs?
- Import tariffs are a tax on imported goods, paid by the importing company to the government.
- Tariffs can be used to protect domestic industries, raise revenue, or punish foreign countries for unfair trade practices.
- Tariffs are collected by Customs at ports of entry.
Alan Bracken Explains How Tariffs Work on YouTube
How Do Tariffs Work For an Importing Company
Let’s be clear here, tariffs are a tax imposed on the importer that is bringing goods into their country and that tax is paid to the importing country, or actually, their treasury.
It’s important to note that when tariffs are discussed, mainly on the subject of “imposed tariffs”, what’s usually meant is, an increase in tariffs. Tariffs themselves have long been an accepted part of international trade and there are tariffs on millions of goods that enter a country. The issue that we are going to discuss addresses increases in tariffs.
Let’s start with an example, let’s say you are a US company that imports mobile phones from China. For the sake of this example, you are importing phones from China at a total cost, door to door, import tariffs included, to the US for $100 per phone.
Now let’s assume that the US government one day decides to increase the tariff on mobile phones from China by 25%. This means that you, as the importer and as a US company, will pay the increased tariff cost, or extra tax and you’ll pay that to the US treasury. To be clear, China will not pay this import tariff or tax, the company in China that sells the phones, will still be paid the original agreed price for those phones.
So you, as the importing US company, have a choice to make:
- Eat and absorb the extra 25% tariff imposed, reducing your profits
- Split the cost of the extra 25% tariff with your customer and increase the price by 12.5% (for example)
- Pass the entire extra 25% tariff on to your customers so your consumers pay more
- Find a new supplier of your phones from a country that does not have tariffs imposed on it
So…in his first 100 days, Trump imposed, or has threatened various tariffs on products from Canada, Mexico, China and the European Union.
Why would he do that?
Tariffs and Trade Policies
Tariffs are a trade policy tool that is used to achieve specific goals such as protecting industries at home or raising revenue. We will assume that Trump’s tariffs are not intended as a way to raise extra money for the government.
By introducing tariffs, countries can control the flow of goods and services across their borders and manage their economic relationships with these countries, often taking actions against other countries due to their trade practices, which in general terms, leads to a “trade war” but tariffs can be used in a way to boost production at home and safeguard jobs in key industries.
Tariffs can be imposed unilaterally by a country or as part of a trade agreement. When imposed unilaterally, tariffs are usually a direct response to some kind of trade imbalance or economic threat. When part of a trade agreement, tariffs are often negotiated to create a balanced economic relationship between trading partners and ensure fair competition and mutual benefits.
Tariffs can be used to address unfair trade practices such as “dumping” or subsidies. Dumping is when a country exports goods at a price lower than their domestic market value and undermines local industries in the importing country.
An example of “dumping” in trade tariffs can be seen with electric scooters. Suppose a country like China produces electric scooters at a much lower cost because of government subsidies and cheaper labor. If Chinese manufacturers then export these scooters to the US or Europe at prices way below their production cost — or even below what they charge in their own domestic market — that’s dumping.
In 2018, this actually happened. The European Union imposed anti-dumping tariffs on Chinese electric scooters after an investigation found that manufacturers were selling them at artificially low prices, harming European manufacturers.
Those low-priced imports made it impossible for local companies to compete, resulting in job losses and stifled production in the EU. So the EU added tariffs to level the playing field and protect its electric mobility industry.
Tariffs can level the playing field by increasing the cost of dumped goods and protect domestic producers from unfair competition. Similarly, when foreign governments subsidise their industries, tariffs can counteract those subsidies and ensure domestic firms are not competing in the global economy at a disadvantage.
Tariffs can also be used to protect national security interests. By imposing tariffs on critical goods such as steel and aluminum, a country can reduce its dependence on foreign suppliers and ensure a domestic supply for defence and a country’s infrastructure. This strengthens national security by keeping essential production capabilities within the country’s borders and under its own control.
Tariffs and the Economy
On the flip side, tariffs however can mean an increase in prices for consumers, lower economic growth and job losses. Remember, tariff revenue is collected from the US importer not the exporting country (China), so there tend to be broader economic effects.
These can include lost income because of the extra tax (for the US company that has the goods imported) and retaliatory measures from countries which can hurt other companies in the US that export their goods.
When tariffs are imposed the extra cost gets passed down so prices go up for those goods. This reduces consumer spending and therefore economic growth as spending falls. Industries that rely on imported materials can face higher production costs and potential job cuts as companies try to balance their costs.
Tariffs very often lead to “revenge” tariffs from other countries and a “war” begins. In a trade war countries impose tariffs on each other’s goods which disrupts global trade. This tit for tat can lead to a cycle of increasing tariffs and harm global economic relations and potentially lead to long term economic instability.
The impact of tariffs on an economy depends on the level of tariffs, the products affected and the response of trading partners. High tariffs on essential goods such as steel, can have a bigger impact as they directly affect consumer prices and business costs. A trading partners response imposing their own tariffs or looking for alternative trade agreements can further affect both domestic and international markets.
So, tariffs can affect the global supply chain and lead to delays and increased costs to the domestic economy. Companies that rely on global supply chains can face disruptions as tariffs change the flow of goods and materials. This can mean longer lead times, inventory shortages and higher operational costs as businesses adjust their logistics to find their way around the new trade environment.
Who benefits from Tariffs?
The simplest answer in our example, is the US federal government because they receive the “import tax” revenue which goes into the Treasury’s bank account. This revenue stream can be significant especially when tariffs are imposed on high demand goods.
Trump’s tariffs, for example, will have a big impact on the federal government by increasing its revenue but also as we’ve learned, it’s also going to affect US industries and US consumers.
As we’ve seen from “anti-dumping” tariffs, industries can benefit from tariffs if they are protected from foreign competition and can grow and maintain jobs. By imposing tariffs domestic producers can increase their market share and invest in innovation and expansion and compete in a global economy.
Tariffs can also benefit consumers if it leads to increased production at home and lower prices over time. When an industry thrives it can offer competitive pricing and better product quality and ultimately benefit the consumer.
However tariffs can also harm consumers if it leads to higher prices and reduced choice. When tariffs are imposed the cost of imported goods goes up and can limit consumer options and increase the cost of living. This economic burden can disproportionately affect low income households who spend a larger portion of their income on essentials.
The Effects of Tariffs
Tariffs can have far-reaching effects on the economy, consumers, and businesses. One of the biggest and most obvious impacts is that they tend to raise prices for consumers. When a country imposes tariffs on imported goods, the cost of those goods increase.
Businesses more often than not, pass this additional cost on their consumers, resulting in higher prices for these items. This of course in turn can lead to inflation, as the increased cost of goods reduces the real purchasing power of consumers.
However, remember tariffs play their role in protecting domestic industries. By making imported goods more expensive, tariffs can give domestic businesses a competitive edge. This can lead to increased production and employment within the country. However, this protection can also result in inefficiencies and higher costs for consumers, as domestic businesses may not be as competitive or efficient as their foreign counterparts.
Circling back to question of why would Trump impose his tariffs, he’s made his case that of course it will “Make America Great Again!”, giving domestic producers the opportunity to increase market share etc.
However, Trump’s tariffs will also very trigger retaliatory tariffs from other countries. When the US imposes tariffs on another country’s goods, the affected country will likely respond by imposing its own tariffs on the US’s goods, escalating into a trade war, where multiple countries impose tariffs on each other’s goods, leading to higher prices and reduced trade. Trade wars disrupt international trade relations and have long-term economic consequences.
Tariff Wars and Retaliatory Tariffs
One of the difficulties in handling a trade war, is that tariffs are not imposed on like-for-like goods.
The first Trump administration slapped tariffs on Chinese steel in 2018, as part of a broader trade conflict with China. In response, China implemented new tariffs on major U.S. exports, one of them being soybeans, which significantly damaged American farmers in lost exports.
Before the tariffs, the U.S. was China’s primary supplier of soybeans and was a huge market for US farmers. But of course, following the tariffs, China reduced its imports from the U.S., and instead turned to Brazil and Argentina.
Trump’s tariffs were put in place to help the US steel industry but the reciprocal tariff threw American soybean farmers into a massively difficult position, forcing Trump’s government to offer billions in subsidies to American Soybean farmers.
The tariffs on Chinese goods were part of President Trump’s strategy to combat what he saw as unfair trade practices and to address the trade deficit with China. By targeting essential materials like steel and aluminum, the Trump administration aimed to shield US industries from what it considered predatory pricing and overproduction by Chinese manufacturers. However, this approach also triggered a series of retaliatory tariffs from China, escalating tensions between the two economic powerhouses.
This war escalated as many U.S. companies who were dependent on Chinese imports for manufacturing their products faced increased production costs, which were passed down to consumers as higher prices. This raised concerns about inflation and ate away at consumers purchasing power.
In response to the tariffs, some U.S. businesses began looking for alternative supply chains not affected by the tariffs to reduce the impact of higher costs and try and keep pricing competitive.
Meanwhile, soybean farmers suffered as China turned to other countries for its soybean supply, American farmers faced a terrible situation of a surplus of stock that no one would buy and declining prices.
So…you can see the complexities of using tariffs as a tool for economic and geopolitical leverage. Once you start down that road, it can become very messy to manage indeed.
The Role of Government in Tariff Policy
The government’s role in tariff policy involves balancing the competing interests of different groups, including domestic businesses, consumers, and foreign countries. Policymakers must weigh the potential benefits of tariffs, protecting domestic industries and raising revenue, against the potential costs, higher prices for consumers and reduced trade.
Additionally, the government can use tariffs as a tool of industrial policy to support specific industries or sectors. For example, tariffs may be imposed on imported goods to protect domestic industries that are struggling to compete with foreign businesses. This approach aims to boost domestic production and safeguard jobs, but it must be carefully managed to avoid the negative effects on the economy that we’ve discussed.
When thought through and planned well, a government can develop tariff policies that can protect domestic industries and minimise the downside on consumers and international trade relations.
US Steel and Aluminum Imports
Steel Tariffs: Boon or Burden?
Now in 2025, Trump has raised the stakes on steel again, hoping to boost US steel production and protect American manufacturers. His supporters say higher tariffs will create demand for American steel, jobs and a comeback of the industry. But critics argue it will cost businesses and consumers more and not address the long-term decline of the American steel industry.
It should be mentioned that the tariffs on steel imports from Canada and Mexico are seemingly part of a broader strategy to address issues like immigration policies and drug enforcement, perhaps more of a national security strategies aimed at protecting American interests but I’m not sure the correlation here is correct nor that tariffs would be the answer to the problem.
More likely, Trump’s tariffs on imports from China, Canada, and Mexico, are intended to address what he sees as unfair trade practices, reduce the U.S. trade deficit, and strengthen US manufacturing.
However, as you now know, these tariffs have many potential consequences.
The Case for Higher Tariffs to Protect Domestic Industries
Advocates of higher steel tariffs believe it will encourage domestic production by making foreign steel more expensive and raise tariffs to protect national security and local industries. Higher demand could mean new investments in steel plants, jobs, and less dependence on foreign suppliers but this will of course take time, perhaps decades.
Challenges of the U.S. Steel Industry
While the goal of boosting U.S. steel is great for the US and a good idea, the fact is the industry has been declining for decades. Many steel mills have shut down due to high costs, outdated facilities and global competition. Even if higher tariffs creates more demand for American steel, meeting that demand will very likely require significant investment and time to modernise and expand capacity. This isn’t immediate, so in the short term, steel shortages could mean higher prices across multiple industries, increased costs for consumers and a rise in inflation.
Cost to Consumers and Businesses: How Tariffs Raise Prices
As U.S. steel remains expensive and supply can’t keep up, businesses that use steel and aluminum – car manufacturers, construction companies and canned beverage producers – will pay more. Those costs will be passed down to consumers, making everyday items more expensive. Or some manufacturers may import steel from countries that don’t have these tariffs, such as Malaysia, which would neutralise any of the intent of the tariffs anyway.
Alternative Steel Suppliers
While tariffs are being applied to specific countries, the U.S. can still import steel from countries with better trade agreements. For example, Malaysia is a major steel supplier to the U.S. In 2024, Malaysia produced 10 million metric tons of steel, making it a serious option for American businesses looking for cheaper imports. This allows U.S. companies to buy steel at competitive prices, offset the cost of tariffs on other foreign suppliers and have a steady supply for industries that use steel products, essential a “loophole” to avoid the new tariffs.
Conclusion
The steel tariffs are a double edged sword. While they protect and stimulate domestic production, the fact is reviving the U.S. steel industry will take years, even decades and a significant financial investment.
In the meantime, businesses and consumers will pay the price, either through higher prices or by sourcing from alternative suppliers. As Trump pushes for self-sufficiency in steel production, he must also consider the economic impact on industries that rely heavily on cheap steel and aluminum, as well as US companies that will be affected by “revenge tariffs”…remember the soybean farmers!
For now, US businesses must weigh their sourcing options and consumers should prepare for higher prices on steel related products – from cars to canned goods.
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