Tariffs: How They Work, Who Pays, and Why Trump Favors Them
President Donald Trump has long supported tariffs, and during his first month back in office, he quickly imposed new, relatively high tariffs on imports from Canada, Mexico, and China.
While Trump has temporarily suspended tariffs on Canada and Mexico for at least a month while those countries negotiate trade and border security, new 10% tariffs on Chinese imports began this week.
Given Trump’s history, it is likely he will continue to use tariffs as a negotiating tool in the next four years.
CNBC spoke with trade expert David Gantz to address some common questions Americans might have about tariffs, especially after the recent news surrounding Trump’s use of them.
Gantz, the Will Clayton Fellow in Trade and International Economics at Rice University’s Baker Institute for Public Policy, and former U.S. judge for the Administrative Tribunal of the Organization of American States, also worked as a consultant for the World Bank.
What is a tariff?
“A tariff is essentially a tax on imported goods,” explained Gantz. “The tax is based on the value of the goods declared by the exporters.”
“For some products, it’s a fixed price per ton, but for most consumer goods, it’s based on the value of the product,” Gantz added. “The value typically reflects what an independent buyer would pay an independent seller.”
Goods subject to tariffs can include commodities like steel, components like automobile transmissions, and finished products like a Mercedes-Benz sedan. Tariffs usually take the form of a percentage of the product’s value. For example, a 2.5% tariff would mean paying $2.50 on every $100 worth of goods.
Who pays the tariff?
“The importer is responsible for paying the tariff,” Gantz said.
For instance, a U.S. automobile company importing a transmission from Korea to assemble an SUV would pay the tariff on that part. However, “under normal circumstances, the importer would pass the cost along the chain to wholesalers, distributors, and ultimately to consumers,” he noted.
While the importer initially covers the tariff, the final cost is usually shifted to the end user, who may pay higher prices.
Using the example of Canadian crude oil, Gantz explained that under Trump’s now-suspended tariffs, a 10% levy would apply to energy imports from Canada. If crude oil is priced at $60 per barrel, the tariff would add $6 to each barrel, which would eventually be passed on to consumers at the gas pump.
“BP is not going to absorb that additional $6,” Gantz emphasized. Likewise, perishable goods like fruits and vegetables, which have low profit margins, would likely see their prices fully reflect the tariff costs. However, for items with higher profit margins, such as branded shoes, the company may absorb some of the tariff cost without passing it all on to the consumer.
Who collects tariffs?
“Tariffs are collected by Customs and Border Protection, which is part of the Department of Homeland Security,” Gantz said. “The funds go directly into an account that supports the Treasury Department.”
The Treasury is responsible for collecting revenue for the U.S. government.
How much does the U.S. government earn from tariffs?
Not much — historically, tariffs have contributed a small portion of federal revenue.
In fiscal year 2024, the U.S. collected $77 billion from tariffs, which made up about 1.5% of total federal revenue, according to the Congressional Research Service (CRS). For the past 70 years, tariffs have accounted for no more than 2% of total federal revenue, CRS reports.
Why are tariffs used?
When the U.S. was founded in the late 18th century, tariffs were the primary source of government revenue, as there was no income tax until 1913. For over a century, they were a key revenue stream.
Tariffs were also easy to collect at the border. “If you don’t pay, you don’t get your goods,” Gantz explained. Additionally, high tariffs protected fledgling industries, especially in New England, by making imported goods less competitive.
Why are tariffs less common today?
After the establishment of the federal income tax in 1913, tariffs became less important as a revenue source. In 1930, the Smoot-Hawley Tariff Act increased tariffs on many imports to protect U.S. businesses during the Great Depression. This led to retaliatory tariffs from other countries, worsening the economic crisis.
“When we raise tariffs, other countries do the same,” Gantz noted. For example, when Trump proposed a 25% tariff on imports from Canada, the country responded with a list of U.S. goods worth $150 billion that they would target with increased tariffs, focusing on products from states that supported U.S. tariffs.
China also announced plans to impose tariffs on U.S. goods, such as a 15% tariff on coal and liquefied natural gas and a 10% duty on crude oil and agricultural machinery.
Gantz pointed out that lower tariffs help U.S. consumers, especially low-income families. “Lower tariffs save families $2,000 or $3,000 a year on items like TVs and toys,” he said. “That savings is important for low-income workers.”
What about Trump’s perspective?
In his inaugural address, Trump praised former President William McKinley, who championed the McKinley Tariff of 1890, which raised import duties. “President McKinley made our country very rich through tariffs,” Trump said.
Gantz noted that Trump’s rationale for imposing tariffs, including controlling migration and curbing the flow of fentanyl from Mexico, Canada, and China, is not typical for tariff policies.
“Trump has long been concerned with the U.S. trade deficit with Canada and Mexico,” Gantz said, adding that Trump also wants to encourage companies in those countries to relocate to the U.S. He views tariffs as a way to generate revenue, which could potentially allow tax cuts, particularly for the wealthy.
“Trump loves tariffs,” Gantz concluded. “He sees them as the solution to everything.”
