Tariffs Explained: What Are Tariffs & How Do They Work?

In today’s global economy, tariffs play a crucial role in shaping international trade. Whether you’re hearing about them in the news, at work, or on social media, understanding tariffs is essential. But what exactly are tariffs, how do they function, and why are they so controversial, especially with Trump’s recent moves? Let's break it down.

TL;DR

• Tariffs are taxes placed on imported goods.

• They can protect domestic industries, raise government revenue, or serve as political tools.

• Trump's new tariffs aim to balance trade but may lead to economic tensions.

• The mechanics of tariffs affect consumers, businesses, and international relations alike.

What Is a Tariff?

A tariff is a government-imposed tax or duty on goods and services imported into a country. Tariffs are among the oldest tools in international trade, dating back centuries.

Primary Objectives of Tariffs:

• Revenue Generation: Historically, tariffs were a significant source of national income.

• Protectionism: Tariffs make imported goods more expensive, encouraging consumers to buy domestic products.

• Trade Negotiation Tool: Tariffs can be used to pressure foreign countries during trade negotiations.

• Balancing Trade Deficits: By making imports costlier, governments hope to reduce reliance on foreign goods.

In modern economies, tariffs are less about revenue and more about protecting domestic jobs, industries, and strategic sectors like steel, aluminum, or technology.

How Do Tariffs Work?

Tariffs directly impact the price of imported goods and ripple through the entire supply chain.

The Mechanism:

• Imposition: A government sets a tariff rate on specific goods, for example, a 20% tariff on imported steel. (Source: BBC)

• Customs Collection: When the goods arrive, customs authorities collect the tariff from the importer.

• Cost Pass-Through: Importers typically pass the cost to businesses or consumers through higher prices.

• Market Reaction: Domestic producers may gain a competitive edge since imported goods become pricier.

Example:

If the UK imposes a 25% tariff on imported cars from Germany:

• The German car becomes 25% more expensive for British consumers. (Source: The Guardian)

• UK car manufacturers become relatively cheaper alternatives.

• The government earns revenue from collected tariffs.

Types of Tariffs:

• Ad Valorem Tariffs: A percentage of the item's value (e.g., 15% of the car's price).

• Specific Tariffs: A fixed fee per unit (e.g., £100 per washing machine). (Source: Investopedia)

• Compound Tariffs: A mix of both (e.g., 10% + £50 per unit). (Source: The Balance)

President Trump's Tariff Policies

Donald Trump's presidency has marked one of the most aggressive uses of tariffs since the mid-20th century.

The Rationale Behind Trump’s Tariffs:

• Correct trade imbalances, especially with China.

• Protect strategic US industries.

• Encourage the return of manufacturing jobs to the US.

Key Measures:

• Steel and Aluminium Tariffs: In 2018, the Trump administration imposed 25% tariffs on steel and 10% on aluminium imports, citing national security. (Source: BBC)

• China Tariffs: Trump launched a tariff campaign targeting hundreds of billions worth of Chinese goods during the US-China trade war.

• Reciprocal Tariffs (2025 Update): Trump’s reciprocal tariff policy, in place globally since 2 April 2025, applies a standard 10 per cent duty on most imports from countries that impose tariffs on US goods. In many cases, higher country-specific rates, some exceeding 40 per cent, have been introduced or threatened. 

As of August 2025, the policy remains active and has been extended through a series of executive orders. These include additional tariffs targeting transhipment to evade duties, as well as the suspension of the de minimis exemption for low-value imports, due to take effect in late August.

Moreover, several countries already face tariffs of up to 40 per cent, and 22 nations have been formally warned of possible increases to between 25 per cent and 50 per cent if trade disputes remain unresolved. Legal and diplomatic uncertainty persists, particularly after a court ruling on 28 May declared certain tariffs imposed under the International Emergency Economic Powers Act unlawful. That ruling has been stayed pending appeal, and the tariffs continue to be enforced.

Recent executive orders have revised tariff schedules for multiple countries, with most adjustments taking effect in July and August. Key changes include Canada’s tariffs rising to 25 per cent, possibly increasing further to 35 per cent, Brazil facing duties of up to 40 percent, and exemptions granted for UK aerospace products. 

Overall, the US government continues to rely on these tariffs as a central instrument in trade negotiations and ongoing disputes with major global partners.

Conclusion

Tariffs are powerful tools but come with trade-offs. While they can protect industries and correct trade deficits, they often lead to higher consumer prices and strained international relationships. Trump's tariff approach highlights both the influence and potential pitfalls of using tariffs in modern trade policy.