Explain tariffs to me: What are they? How do they work?

WASHINGTON - Tariffs may be top of mind for newswatchers as President Donald Trump’s long-threatened tariffs against Canada and Mexico went into effect on Tuesday. 

The administration also doubled tariffs on Chinese goods to 20% a day earlier than expected, prompting China to impose additional tariffs of up to 15% on imports of key U.S. farm products.

Here's what tariffs are, and what to know about them:

Explain tariffs to me

What we know:

A tariff is a tax imposed on imported goods and services that can be used to protect domestic industries and national interests, raise revenues, and serve to punish foreign countries for unfair trade practices.   

How they work:

They are typically charged as a percentage of the price a buyer pays a foreign seller. In the U.S., tariff rates vary. They are generally 2.5% on passenger cars, for instance, and 6% on golf shoes. In the United States, tariffs are collected by Customs and Border Protection agents at 328 ports of entry across the country.

Tariffs can be lower for countries with which the United States has trade agreements. Before the U.S. began imposing 25% tariffs on goods from Canada and Mexico as of Tuesday, most goods moved between the U.S. and those countries tariff-free because of Trump’s U.S.-Mexico-Canada trade agreement.

Big picture view:

The United States in recent years has gradually retreated from its post-World War II role of promoting global free trade and lower tariffs. That's generally a response to the loss of U.S. manufacturing jobs, widely attributed to unfettered free trade and China's ascent as a manufacturing power, according to the Associated Press. 

Dig deeper:

Mainstream economists are generally skeptical about tariffs, considering them an inefficient way for governments to raise revenue. They’re also likely to provoke retaliation.

Trump, on the other hand, is a proponent of tariffs – insisting that they are paid for by foreign countries. In fact, it is importers — American companies — that pay tariffs, and the money goes to the U.S. Treasury. Those companies 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.

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Still, tariffs can hurt foreign countries by making their products pricier and harder to sell abroad. Foreign companies might have to cut prices and sacrifice profits to offset the tariffs and try to maintain their market share in the United States. 

Yang Zhou, an economist at Shanghai’s Fudan University, concluded in a study that Trump’s tariffs on Chinese goods inflicted more than three times as much damage to the Chinese economy as they did to the U.S. economy.

Trump’s reasoning for tariffs

What they're saying:

Trump has said tariffs will create more factory jobs, shrink the federal deficit, lower food prices and allow the government to subsidize childcare.

"Tariffs are the greatest thing ever invented,’’ Trump said at a rally in Flint, Michigan, during his presidential campaign.

What we know:

During his first term, Trump imposed many tariffs — targeting imported solar panels, steel, aluminum and pretty much everything from China. He’s now moving ahead with higher tariffs in his second term. He increased steel and aluminum tariffs to 25%, eliminating exceptions, and recently announced plans to impose tariffs on overseas agricultural products.

Trump has also used tariffs to pressure other countries on issues that may or may not be related to trade. In 2019, he used the threat of tariffs as leverage to persuade Mexico to crack down on waves of Central American migrants crossing Mexican territory on their way to the United States.

The new tariffs on Canada and Mexico were implemented to combat "the extraordinary threat to U.S. national security, including our public health posed by unchecked drug trafficking," according to a statement from the White House. 

History of tariffs in the US

Timeline:

Before the federal income tax was established in 1913, tariffs were a major revenue source for the government. From 1790 to 1860, tariffs accounted for 90% of federal revenue, according to Douglas Irwin, a Dartmouth College economist who has studied the history of trade policy.

Tariffs fell out of favor as global trade grew after World War II. The government needed vastly bigger revenue streams to finance its operations. 

In the fiscal year that ended Sept. 30, the government collected around $80 billion in tariffs and fees, a trifle next to the $2.5 trillion that comes from individual income taxes and the $1.7 trillion from Social Security and Medicare taxes.

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