What Are Tariffs?

Tariffs are a form of import taxes, one which governments levy (impose) on imported goods before they are allowed to enter the country. This effectively raises the price of foreign goods compared to domestic rivals.

Tariffs are meant to give an advantage to domestic goods, but the effects aren't always quite that simple. Let's look at a detailed definition of what tariffs are and some examples of how they have affected the U.S. economy in the past.

What Are Tariffs?

Tariffs are a special kind of tax that applies to goods based on the geographic location that they came from. The tax is imposed as a percentage of the total cost of the product, including freight and insurance. In the United States, Congress sets the tariffs.

• Alternate names: Customs, import duties, import fees

How Do Tariffs Work?

Tariffs work by increasing the price of imports. Those higher prices give an advantage to domestic products within the same market. They are used to protect a nation's industry.

Despite the protectionist motivations, tariffs tend to be a barrier to international trade and business overall. Other countries often retaliate and impose their own tariffs.

As of 2018, the average U.S. tariff was less than 2%. Countries charge different tariff rates depending on the industry they are protecting. They may also charge sales taxes, local taxes, and extra customs fees. Governments collect this at the time of customs clearance.

Countries waive tariffs when they have free trade agreements with each other. The United States has trade agreements with 20 countries. U.S. businesses target their exports to these countries because they won't face any tariffs that eat into their profits. Their foreign customers also benefit by paying less for tariff-free U.S. exports. 

The Harmonized Tariff Schedule lists the specific tariffs for all 99 categories of U.S. imports. It's called “harmonized” because it's based on the International Harmonized System, which allows countries to classify trade goods uniformly between them. The system describes most of the world's trade goods. The International Trade Commission publishes this information.

The HTS is a guide. The U.S. Customs and Border Protection is the final authority that determines the tariff. It is the only agency that can provide legal advice. It also helps in determining the classification of your import. 

Pros and Cons

Pros Explained

• Threatened domestic industries may ask for tariffs: When a domestic industry feels threatened, it asks Congress to tax its foreign competitors' imports. By doing so, the government can please key players in a domestic industry.
• Can create more domestic jobs in certain industries: When goods are tariffed, the industry that produces those goods often sees an increase in job creation. This helps employ more people in the sector.

Cons Explained

• Consumers pay higher prices: Tariffs are a tax, and like any tax, they increase the price that consumers pay for a good.
• Hurts relationship with other countries: Countries don't like when tariffs are imposed on their exports, so the relationship between countries often deteriorates. They often retaliate with their own tariffs on similar products.

Examples of U.S. Tariffs

The following examples of U.S. tariffs illustrate how these import taxes function.

2018 Steel and Aluminum Tariffs

On March 1, 2018, President Donald Trump announced he would impose a 25% tariff on steel imports and a 10% tariff on aluminum. The stated purpose was to create more domestic jobs and help the U.S. steel and aluminum industries grow. By 2019, the Congressional Budget Office had found that the policy had a negative overall effect on the economy, forecasting a roughly 0.3% decrease related to the tariffs in U.S. GDP by 2020.

The president can act without Congress' approval only to curb imports that threaten national security. President Trump was able to impose tariffs on steel and aluminum products only after the Commerce Department reported that dependence on imported metals threatens the ability of the U.S. to make weapons. The tariff had a significant impact on China since it's a major steel exporter. Trump's move came a month after he imposed tariffs and quotas on imported solar panels and washing machines.

Great Depression Tariffs

Tariffs also contributed to the economic hardships of the Great Depression of 1929. In June 1930, the Smoot-Hawley Tariff raised already-high tariffs on agricultural imports. Its purpose was to support U.S. farmers who had been ravaged by the Dust Bowl. The resulting high food prices hurt Americans who were suffering from the effects of the Great Depression. It also compelled other countries to retaliate with their own protectionist measures. As a result, world trade dropped around 65%. Since then, most countries have been reluctant to impose tariffs.

Agricultural Product Tariffs in the 1920s

In 1922, Congress imposed the Fordney-McCumber Tariff on imported products, especially agriculture. Legislators were responding to a glut of farm products. During World War I, European farmers couldn't produce. Other countries replaced their food supply. When the European farmers returned to production, it increased the food supply beyond global demand. As prices dropped, U.S. farmers complained.

The Tariff of Abominations in the 1820s

On April 22, 1828, the federal government levied the Tariff of Abominations on most imports. It was designed to protect Northeast manufacturers. Instead, it hurt the South. It did two things by raising prices on imports.

First, it increased costs for most goods. That damaged the agrarian South the most. Second, it reduced trade with England, the South's primary buyer of cotton. When British businesses couldn't compete with New England manufacturers, they bought less cotton. As a result, the South's costs rose and its income fell. That's why Southerners called this tariff an abomination.

Opposition to the tariff helped elect Andrew Jackson to the presidency. He beat John Quincy Adams, who had approved it. Vice President John Calhoun drafted the South Carolina Exposition and Protest, which granted states the right to nullify any federal law they didn't like. In November 1832, the South Carolina legislature nullified the tariff. The action created a constitutional crisis over states' rights. In January 1833, the state backed down. But tensions remained high, contributing to the start of the Civil War.