A Vox reader asks: Can you explain how tariffs work? How will imposing tariffs impact the everyday lives of Americans?
The tariffs President Donald Trump promised on Canada, Mexico, and China are now in force: each country must now pay a 25 percent tariff on all goods exported to the US (with a lower rate for some Canadian energy products), while there’s an additional 10 percent tariff on Chinese goods on top of previous duties.
Mexico has promised retaliation. Canada put tariffs on $30 billion worth of US exports, and has promised tariffs on an additional $125 billion by the end of the month; China announced tariffs of 10 to 15 percent on a wide range of US agriculture and food products.
Trump has long extolled the benefits of tariffs, infamously saying that “tariffs is the most beautiful word in the dictionary,” surpassed only by God, religion, and love. Trump has also claimed that “tariffs are going to make us rich as hell” and will “bring back businesses that left us.”
Basically, to hear the president tell it, tariffs are magical things that make everyone’s lives better.
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Tariffs aren’t a magic wand, but a complex — and potentially dangerous — economic tool that could make life more expensive and difficult. In the hours after the tariffs went into effect, the US stock market dropped, and major companies began to warn of higher prices.
And the turbulence caused by tariffs may continue. Trump has promised to enact tariffs against a potpourri of metal, car, and agricultural imports. And that makes it important for people to understand tariffs and how they might affect life in the US.
Let’s start with the basics: A tariff is a kind of sales tax federal governments levy at ports of entry that applies to imported goods, paid by the entity (usually a company) that imports that good. Study after study has shown that companies pass these costs on to their customers.
Tariffs are generally calculated as a percentage of the cost of a good; if you have a 25 percent tariff, that means the cost of the tariff is 25 percent the cost of the good.
Typically, a government, say the US government, sets a tariff on a certain good or class of goods made abroad. When that good reaches a US port of entry, the company importing it has to pay the government before they can receive it.
Historically, tariffs have tended to apply only to certain countries, and only certain goods from those countries. For example, the Biden administration put targeted tariffs on batteries, electric cars, and solar panels being made in China, citing economic and national security concerns.
What’s unusual about Trump’s proposed tariffs is that they’re on all goods from entire countries. The 25 percent tariff on Canada wasn’t just on maple syrup to protect producers in Vermont — it was on everything that country makes (with some energy products being hit with 10 percent tariffs).
The other strange thing about the Trump tariffs is that they don’t account for what are known as de minimis exemptions. These are carve-outs on tariffs for items below a certain price point, usually cheap goods that are too small for the government to worry about.
Those exemptions are what allow companies like Shein and Temu to operate. Trump’s new tariffs don’t appear to eliminate that exemption.
How would Trump’s tariffs affect Americans?
The effect of any tariff depends on which country the tariffs target, what goods they produce, as well as whether and how they retaliate. But one analysis from the Tax Foundation found that Trump’s tariffs on Mexico, Canada, and China could cost the average American household $800 this year.
Tariffs targeting Mexico and Canada would also have a particularly acute economic impact. North American trade agreements have allowed companies to treat the US, Canada, and Mexico like one country for decades — and many companies have built supply chains and lines of business around there being relatively free movement of goods. The Trump tariffs — as well as other countries’ reprisals — would make that level of integration impossible to maintain, and that would mean higher prices, and could even force companies out of business.
Take the auto industry as an example.
Say Ford makes the windshields for one of its truck in Canada, then installs those windshields in the US, sends the truck frame to Mexico for motor installation, then brings the truck back to the US for final assembly and sale, and all of those countries have 25 percent tariffs on each other — that’s four 25 percent tariffs.
That level of tariffs would make it impossible for Ford to continue building that truck that way. Likely, it would try to keep that product line alive by consolidating manufacturing. As a business intent on making money, it would probably try to do so in the least expensive way possible, which would likely mean moving factories out of the US. And that would mean an acceleration in the decline of American manufacturing, as well as a decline in the number of available US-based jobs.
In the short term, the consumers would have to pay a lot more for that truck to cover the costs of those four tariffs, and in the long term, more to cover the costs of moving manufacturing. And that is in the best case scenario. In the worst case, again, the tariffs become so onerous so quickly that Ford has to shut down, taking many American jobs with it.
The bottom line is this: At best, tariffs will mean you will need to pay more for goods and services than you do now. And at worst, they could create large economic disturbances.
Dylan Matthews contributed reporting. For more from Explain It to Me, check out the podcast.
Update, March 4, 2:15 pm: This piece was originally published on February 5, and has been updated to reflect the first tranche of tariffs going into effect.
