Tariffs are a big part of Trump's trade policy. Do they actually work?

Tariffs can have unwelcome side effects. Photo shows shipping containers in Savannah, Georgia. — (cc) Tom Driggers, via Flickr.

Google searches for the word “tariffs” skyrocketed as Donald Trump declared victory in the 2024 presidential election. In his first presidential term, Trump employed tariffs against China in general, but also ordered tariffs on specific goods from all countries, including solar panels, washing machines, steel, and aluminum. And in his 2024 campaign, he promised 10% tariffs across the board on all imported goods – and 60% for goods made in China.

Trump seems to view tariffs as a financial band-aid for everything from closed U.S factories to China’s rising global power, and from minimizing the risk of developing new technologies to the cost of increased border security – and as a way to discourage countries and companies from utilizing currencies other than the U.S. dollar.

What are tariffs, exactly?

A tariff is simply a tax that must be paid on a set of imported goods – or, less commonly, on exported goods. As such, tariffs constitute just one of a number of trade barriers, including regulations, quotas, subsidies, and exchange controls. Tariffs distinguish themselves from these other barriers by their direct impact on domestic market prices and by their revenue generation.

Here’s an example. If the world price of a T-shirt is $2, a 100% import tariff would generate $2 in tax revenues for every shirt a country imports. At the same time, the tariff would likely raise the selling price of T-shirts in that country to at least $4 – because the importer or the seller will pass the tariff cost along to the consumer. Domestic producers of T-shirts could then raise their prices to match this world price X tariff total of $4 rather than compete against $2 imports.

Import tariffs thus serve not only to generate tax revenue but also to raise the domestic prices of imported goods – and that benefits domestic producers competing against imported goods. But it’s important to remember that the consumers in that country actually pay the additional costs, whether they are individual shoppers purchasing a T-shirt or an electric vehicle, or consumers of products made domestically that rely on frequently imported inputs such as steel, wood, chemicals, textiles, or computer chips, to name just a handful. In short, import tariffs redistribute money from domestic consumers to their own government and domestic producers. In that way, tariffs function as an additional form of taxation, beyond income taxes and corporate taxes.

What about export tariffs?

Many developing economies and resource-rich countries impose export tariffs. Export tariffs are a duty placed on goods leaving the country. As with import tariffs, export tariffs generate government revenues. A 100% export tariff on a $2 T-shirt would raise $2 in tax revenues for the exporting country. However, since exported goods must compete in the world market, exporters must generally lower the domestic prices of their goods. If the world price of a T-shirt is $2, domestic producers would need to lower the price domestically to $1 to be competitive. Export tariffs redistribute money from domestic producers to the government and domestic consumers.

However, you won’t hear U.S. politicians propose export tariffs. That’s because Article 1, Section 9.5 of the U.S. Constitution forbids export tariffs. At the time, Southern cotton farmers worried that the federal government would seek to pay off debts incurred during the American Revolution via an export tariff on cotton. So Southern colonies refused to join the new United States without the clause restricting export tariffs.

Trade liberalization encouraged lower tariffs

In 2024, import tariffs are lower in the U.S. than in most countries, even compared to other developed economies. The United States and other Western high-income countries have, for many decades, led the push for global trade liberalization, and have lower tariff rates than countries like China. But tariffs are only one form of trade restriction. The U.S. and the European Union also restrict trade via regulations, quotas, subsidies, and other non-tariff barriers. For example, the U.S. and European Union just ended a 17-year dispute over research and development funding for aerospace companies, with each side arguing that government subsidies (to Boeing and Airbus, respectively) served as trade protection. Some research, in fact, suggests that as countries lower their tariffs, they find alternative forms of trade protection.

Tariffs vary greatly across product lines. Although you can find examples of U.S. tariffs above 100% (uncoated felt paper, handbags, bed linen, and bath salts), 200% (edam, gouda, endive, and olives) and even 300% (tobacco) for countries without a special agreement, the most frequently imported goods generally have the lowest tariffs. Thus, in 2022, the U.S. simple average tariff rate was approximately 2.8%, and the trade-weighted average was 1.5%. The low tariff rates mean that individual U.S. consumers have paid relatively little in import taxes – at least until now.

Will tariffs become a heavier burden for U.S. consumers?

Estimates of the anticipated tariff revenues from new tariffs – such as those proposed by Trump – can be tricky to calculate. That’s because the price increases arising from tariffs also change industrial and consumer behavior. The Tax Foundation’s initial estimates of the tax revenue increase from the 2016-2020 Trump administration’s trade war tariffs were around $79 billion – about $625 annually per U.S. household. However, due to changed economic conditions and changing consumer behavior, the actual tax revenues collected were half as much, closer to $200 to $300 annually per U.S. household. Trump’s proposed 60% tariff on goods arriving from China and 10% tariff on all other goods could cost the average U.S. family an additional $1,700 each year, with the costs disproportionately falling on the poorest families.

In summary, tariffs generate government revenues (although the amount of revenue depends on the equilibrium between the new higher prices and their impact on import demand) and have distributional consequences. As a consumption tax, import tariffs tend to be regressive – hurting poorer households proportionally more than wealthy households (albeit how regressive depends on the goods involved). Import tariffs also help some domestic producers at the expense of other domestic producers and export industries. For example, during Trump’s first administration, new lumber tariffs increased prices for home builders, aluminum tariffs increased beer costs, and textile tariffs increased costs for hobbyists and small businesses. And countries affected by the U.S. tariffs responded in kind, hurting American exports, particularly agricultural exports.

Tariffs raise a lot of questions:

Who imposes tariffs in the U.S.?

In the U.S., the imposition of tariffs is constitutionally a decision Congress gets to make. Still, since the signing of the Reciprocal Trade Agreements Act (RTAA) in 1934, Congress has repeatedly granted authority to the president to negotiate bilateral and unilateral trade deals, most of which include tariff provisions. Additionally, depending on one’s interpretation of the Trade Act of 1974, the president also has the right to employ tariffs for national security purposes (section 232), as a temporary measure to protect domestic industry from “serious injury” due to a surge of imports (section 201), and in response to unfair trade practices (section 301). Trump referenced these sections of the Trade Act of 1974 multiple times during his first administration as he sought to impose new tariffs on imported steel and aluminum, solar power equipment, washing machines, and Chinese goods in general.

If tariffs are a tax, why are they so popular with politicians?

One political characteristic of tariffs is that they can be both visible and invisible at the same time. In terms of political messaging, announcing a new or higher tariff is a direct and immediate political response that signals concern for an import-affected industry and its workers. Other government interventions to enhance domestic industries’ competitiveness – such as investment in infrastructure and technology and even subsidies – are indirect, less immediate, and may appear to favor certain companies over others. As many trade-related campaign advertisements show, offering to raise tariffs to ”protect America” is a relatively common promise.

Yet, at the same time, a promise to raise tariffs doesn’t meaningfully tie a politician’s hands. My research finds that tariffs are seldom a promise that politicians have needed to follow through on. Tariff policy is frequently bundled with other policy changes, and voters – even those with strong preferences – don’t follow trade policy closely enough to hold politicians accountable for their promises. Even a politician as vocal as Trump has been able to flip-flop on trade policy with little political cost.

The tariff exemption process also allows politicians to make a splashy public proclamation about being tough on import restrictions yet work behind the scenes to weaken the economic impact for domestic industries reliant on imported inputs such as steel, aluminum, and auto components, for instance. Less publicly, domestic firms reliant on imported inputs could and did request exemptions during the Trump administration’s first term. These exemption requests create a new forum for lobbying and politicking, and new research suggests that political connections matter.

If tariffs hurt the poorest consumers, why doesn’t the public push back?

Tariffs vary in their economic visibility and, thus, their political salience to voters. Unlike a state sales tax printed at the bottom of a receipt or an income tax bracket displayed in an IRS table every spring, consumers don’t actually see how tariffs factor into U.S. manufacturing costs or the final price of goods. Sure, interested consumers could go look for the U.S. Harmonized Tariff Schedule on government websites or the World Trade Organization to download thousands of lines of itemized tariff information – including tariff rates for our hypothetical T-shirt. But most people don’t. And it isn’t just the details that many Americans don’t understand. Trump continues to portray tariffs as a tax that foreign countries or producers pay – rather than a tax whose cost will ultimately be passed on to domestic consumers.

As a result of the lack of visibility, retailers can decide how much the new tariff costs pass through to the consumer and how much they wish to highlight these new costs. In 2017 when Trump proposed a border tax, the National Retail Foundation came out swinging with an infomercial-style advertisement touting the “income chilling, tax bringin, job killing, B.A.T. tax.” (Watch it, you won’t regret it.) In 2018, some retailers again chose to be vocal about the cost of Trump’s China tariffs. JOANN Fabrics sent emails to customers noting that the proposed 25% tariff would “jeopardize your ability to continue creating at an affordable cost.”

But on the flip side, when the Trump administration increased tariffs on washing machines first by 20% and then by 50%, domestic retailers not only passed most of the tariff costs on to consumers, but they also took the opportunity to raise prices on clothes dryers – a product frequently paired with washing machines but not itself affected by the tariff hike. According to one University of Chicago study, U.S. consumers spent an additional $1.5 billion a year as a result, a cost that probably went unnoticed or misattributed by all but the most diligent newspaper readers.

In 2025, here are three big questions about tariffs:

1. Do the benefits of tariffs for protected industries and those who work in them outweigh the cost to consumers and workers in other industries?

Economists’ back-of-the-envelope calculations uniformly say “no,” calling the costs to the national economy and particularly to consumers and workers in non-protected industries too high. But how politicians and the public answer this question may be complicated by the political importance of swing states, the geographic concentration of manufacturing industries, a sense of economic vulnerability, perceptions of fairness, characteristics of the protected industry, and beliefs about whose jobs matter the most.

In other words, it’s complicated. Additionally, the answer might depend on how much and how strategically other countries chose to retaliate against U.S. tariffs. Responses to the George W. Bush steel taxes of 2004 and Trump tariffs of 2018 highlighted the political savviness of U.S. trade partners, who seemed to target swing states and Republican constituencies for retaliatory tariffs.

2. Should the U.S. and other Western countries embrace China’s integration into the global trade system or strategically use tariffs to slow China’s economic rise?

Analysts – particularly those concerned with China’s increased economic and military power – note two parallel events at the turn of the century that accelerated China’s growth. In 1999, the U.S. made China’s most “favored nation status” permanent, ending the uncertainty arising from the previous annual determination process. In 2001, China completed its accession to the World Trade Organization (WTO). Does integrating China into the global trade system tie China to the norms supporting the liberal international order? Or has China’s accession put other WTO members at risk by allowing the Chinese economy to grow unfettered and Chinese goods to dominate the world market?

China’s rapid growth and increased global influence have long made it the primary contender to usurp the U.S. position as the global hegemon, even as predictions differ on when that shift might happen. Chinese government representatives have clearly expressed their expectations that Chinese preferences should soon replace U.S.-led preferences in international organizations and financial markets.

During the Obama administration, the U.S. undertook a military pivot to recognize increased security concerns in the Indo-Pacific region. In a parallel economic move, the U.S. participated in developing the Trans-Pacific Partnership as a multilateral mechanism for encouraging global trade while locking out China.

Trump notably withdrew from the TPP before the Senate moved to ratify the agreement, choosing instead to institute unilateral tariffs targeting China in 2018. Many of these tariffs remained in place during the Biden administration, and the success of the tariff strategy is heavily contested. While many Europeans have called for a return to a multilateral response to China’s increased global power, some scholars argue that U.S. and European interests have diverged too greatly. (As a side note, although most Americans perceive China as the largest U.S. trading partner, Canada actually ranked as the top U.S. trade partner from 2000 to 2015 – and Mexico has been the top U.S. trade partner since 2023. However, China has generally been in the top 4 list of U.S. trade partners, along with the European Union.)

3. Are tariffs an effective way to sanction another country?

Analysis by J. Forrer and Kathleen Harrington found that Trump aggressively used tariffs as a sanctioning tool during his first administration. He has already begun threatening 100% tariffs on countries that do not retain the U.S. dollar as their reserve currency.

When a government imposes tariffs on a target country to influence a change in that government’s policy choices – rather than to protect domestic economic interests – tariffs can be considered more of an economic sanction. The distinction can be fuzzy. The longtime U.S. sanctions against Cuba demonstrate how trade restrictions can serve both purposes. For tariffs to be effective as sanctions, countries must already have substantial trade that cannot be easily rerouted – but is also not too important to the sanctioning country.

Here’s an example, looking at the outcome of Western government sanctions against Russia’s actions in Ukraine – and Russian retaliation. In 2014, in the wake of Russia’s incursion into Ukraine and the downing of Malaysia Airlines flight MH17, the U.S., the U.K., and many non-European countries sanctioned Russia by limiting financial movement. However, European countries dependent on Russian oil struggled to develop equally strong sanctions. Russia retaliated by imposing tariffs and trade embargoes on goods from the countries that had imposed sanctions.

In the short term, the result was empty shelves, long lines, and higher prices across Russia – at relatively little cost to the targeted countries. Yet, in the ten years since, Russia has developed more trade connections, particularly with India and China. This means Russia is now less vulnerable to any economic sanctions – and also potentially less affected by the most recent round of U.S. tariffs.

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Good to Know: How tariffs work