How tariffs work and who they help — and hurt

Countries around the world have used taxes on imported goods — aka tariffs — for centuries as a way to support domestic industries, from manufacturing to agriculture. Tariffs are paid by the companies importing the goods

The idea is that if imported goods are more expensive than those produced “locally,” more companies will invest in making products at home. In an ideal situation, more domestic production means more jobs and lower prices. 

💰💸 Don’t miss the move: Subscribe to TheStreet’s free daily newsletter💰💸

However, it doesn’t always work out that way. 

Tariffs in recent years

After World War II, tariffs “fell out of favor in advanced economies,” according to the Council on Foreign Relations. The reason? Tariffs almost always increase prices, and the price increases are generally passed to consumers. Tariffs also lead to reduced trade and even retaliation from the countries whose goods are being taxed. 

Related: U.S. tariff plan won’t work for the auto industry

During his first term, beginning in 2017, President Trump imposed tariffs on goods imported from China, stating that the U.S. was subject to unfair trade practices. His aim was to reduce the U.S. trade deficit, improve national security and improve economic competitiveness. 

More on retail and bankruptcy:

• Walmart store closing, auctioning off laptops and flat screen TVs
• Home Depot CEO sounds the alarm on a growing problem
• Famous restaurant files for Chapter 11 bankruptcy

Many of the products hit with tariffs during that period were “large” items such as washing machines, solar panels, steel and aluminum. Most of these products were made in China, according to the According to the National Bureau of Economic Research (NBER).

President Biden left most of President Trump’s tariffs in place and both leaders have stated tariffs are an effective tool for reducing trade deficits and are also tool for diplomacy, according to a 2024 story in Axios. 

Fidelity offers a detailed explanation about tariffs, writing, “Despite the possibility of more tariffs [Fidelity] expects inflation to follow a ‘flattish trend’ over the next year. However, they also say that returning to the stable, low inflation of the past 20 years will be ‘challenging.'”

Tariffs throughout history

Students of U.S. history may remember that it was Alexander Hamilton, the country’s first treasury secretary, who believed tariffs could give emerging industries a nudge. 

Tariffs generated revenue for the federal government for centuries, and were a pillar of the American System that made possible the rapid development and industrialization of the United States.

In a detailed history about the problem withAmerican tariffs published by The Cato Institute, economist Phillip W. Magness writes, “Modern American trade policy was restructured in 1934 to bypass the disastrous Smoot–Hawley Tariff Act of 1930, which exacerbated the Great Depression and illustrated the tendency of protectionist tariffs to serve corrupt interest groups.” Magness is the Hayek Chair in Economics and Economic History, American Institute for Economic Research.

Related: New tax cuts could have huge implications for Social Security

Who pays tariffs?

Importers pay tariffs to their home government, but economists agree the costs are largely passed to consumers. This is especially true in sectors like retail — from fashion to electronics to groceries. 

President Trump claims tariffs are paid for by foreign countries but in reality, it is the importers — the American companies — that pay tariffs, and that money goes to U.S. Treasury. 

Those companies, in turn, typically pass their higher costs on to their customers in the form of higher prices. That’s why economists say consumers usually end up footing the bill for tariffs. 

Many studies, such as this one from the Peterson Institute for International Economics, show tariffs affect poor Americans the most.

Related: Veteran fund manager issues dire S&P 500 warning for 2025

#tariffs #work #hurt