How Do Tariffs Affect the Economy?

Short answer

• A tariff is a tax on goods imported from another country. In the United States, the importer pays it to U.S. Customs and Border Protection when the goods arrive, not the foreign seller or the foreign government.
• Tariffs usually raise the price of the imported good, and often of competing domestic goods too. Importers may absorb part of the cost, pass it to buyers, or some mix of the two.
• They can protect jobs and output in the shielded industry, raise government revenue, and give a government bargaining leverage. They can also raise costs for households and for businesses that use imported parts, invite retaliation against exporters, and slow overall growth.
• The net effect depends on the size of the tariff, how many goods it covers, how long it lasts, how buyers and sellers respond, and whether other countries retaliate. Economists disagree about particular cases, but the standard textbook result is that the gains to the protected industry and to government revenue are usually smaller than the losses to buyers.

What a Tariff Is

A tariff, also called a customs duty, is a tax levied on goods imported from another country. The Congressional Budget Office (CBO) describes tariffs and customs duties as interchangeable terms for duties levied on goods and services imported from other countries. Tariffs are usually charged in one of three ways. An ad valorem tariff is a percentage of the value of the good, for example 25 percent of a shipment worth 10,000 dollars. A specific tariff is a fixed amount per unit, for example a set number of dollars per ton or per item. A tariff rate quota allows a set quantity of imports in at a lower rate and charges a higher rate above that threshold. The U.S. Harmonized Tariff Schedule, maintained by the U.S. International Trade Commission, specifies the rate for each product.

Tariffs are not new. In the early United States, customs duties were the federal government’s main source of revenue, because collecting taxes at a small number of ports was simpler than running an internal tax system. Over the twentieth century, as income taxes grew, tariffs shrank to a minor share of federal revenue. The CBO projected in June 2024 that customs revenues would total 872 billion dollars over fiscal years 2025 through 2034, about 1 percent of total federal revenue projected for that period. That projection assumed that tariff rates then in effect would generally remain in place, and it is a projection, not a count of money already collected.

Who sets tariff rates in the United States? Congress holds the constitutional authority to regulate foreign commerce and levy tariffs through legislation. Over time, Congress has delegated considerable authority to the executive branch, allowing the administration to negotiate trade agreements and to restrict imports in specified circumstances. The CBO notes three statutes used for tariff increases beginning in 2018: Section 232 of the Trade Expansion Act of 1962, which applies when the Department of Commerce finds that an import threatens national security; Section 201 of the Trade Act of 1974, which applies when the U.S. International Trade Commission finds that an import threatens a domestic industry; and Section 301 of the Trade Act of 1974, which applies when the U.S. Trade Representative finds that another country has violated a trade agreement or unjustifiably burdened U.S. commerce.

Who Actually Pays a Tariff

The foreign country does not write a check to the U.S. Treasury. The foreign exporter does not normally pay the duty either. The CBO states that U.S. Customs and Border Protection assesses and collects tariffs from importers when their products arrive at a U.S. port. The importer of record, usually the U.S. company bringing the goods in, or its customs broker acting on its behalf, pays the duty before the goods clear customs.

What happens next is where the economics gets interesting. The importer does not simply absorb the cost and carry on. It has choices, and the choice it makes decides who ultimately bears the burden:

• It can absorb the tariff by accepting a lower profit margin, at least for a time.
• It can pass the cost on by raising the price it charges wholesalers, retailers, or final buyers.
• It can ask the foreign supplier for a lower price, shifting part of the burden back to the exporter.
• It can switch to a supplier in a country not subject to the tariff, or to a domestic supplier, which may charge more than the original supplier did before the tariff.
• It can change the product, for example by using different materials, redesigning it, or importing it in a different form.

Economists call this question “incidence”: who really bears a tax, as opposed to who hands the money to the government. The legal payer and the economic bearer are often different people. If the importer raises its price by the full amount of the tariff, buyers bear it. If the importer absorbs it, the importer’s owners and workers bear it through lower profits or lower pay. If the foreign supplier cuts its price, the supplier bears part of it. In practice, the burden is usually shared, and the split depends on how easily buyers can switch to alternatives and how easily suppliers can find other customers. When buyers have good alternatives, sellers absorb more. When buyers have few alternatives, buyers pay more.

A Simple Worked Example

Imagine a U.S. retailer imports a washing machine that costs 400 dollars from a foreign factory. Before any tariff, the retailer sells it for 600 dollars. Now suppose a 25 percent tariff applies. Twenty-five percent of 400 dollars is 100 dollars, so the importer must pay 100 dollars to Customs and Border Protection when the machine enters the country. The importer’s cost is now 500 dollars, not 400 dollars.

What happens to the shop price depends on the importer’s response. If it passes the full 100 dollars on, the price rises toward 700 dollars, and some shoppers will buy a cheaper model, delay the purchase, or buy a domestically made machine instead. If it absorbs half the tariff, the price rises by about 50 dollars and its profit falls. If the foreign factory cuts its price to 360 dollars to keep the business, the tariff is 90 dollars, and the importer’s cost is 450 dollars. All three outcomes are possible, and real markets usually land somewhere between full pass through and full absorption. The key point is that the tariff adds a cost into the chain at the border, and somebody in that chain pays it. The tariff does not create money from abroad.

Why Governments Impose Tariffs

Governments use tariffs for several distinct reasons, and the reason matters for judging the result:

• Revenue. Tariffs raise money for the government, as they did for the early United States. Today they are a small share of U.S. federal revenue, but in some developing countries they remain a larger share.
• Protection of domestic industry. By making imports more expensive, a tariff gives domestic producers breathing room against foreign competition. The argument is often that a young industry needs time to grow, or that an established industry faces unfair competition, for example from foreign subsidies.
• National security. A government may argue that it should not depend on foreign suppliers for goods such as steel, aluminum, or semiconductors, and use tariffs to support domestic capacity.
• Bargaining leverage. A government may impose tariffs, or threaten to, in order to pressure another country into changing its trade practices or to gain concessions in negotiations. The CRS noted in 2019 that the U.S. administration stated it was using tariffs as leverage for broader trade negotiations.
• Retaliation or enforcement. A government may raise tariffs in response to another country’s trade barriers, subsidies, or intellectual property practices, as under Section 301.

What Happens to Prices

The most direct effect of a tariff is on prices. Tariffs raise the cost of imported goods, and that increase tends to spread in three directions.

First, the price of the imported good itself rises, by some or all of the tariff, depending on pass through. Second, the price of competing domestic goods often rises too, because domestic producers face less price pressure. Third, the price of goods that use the tariffed product as an input rises. Steel tariffs raise the cost of cars, appliances, cans, and construction. Tariffs on electronic components raise the cost of finished electronics. This input effect is why a tariff meant to help one industry can hurt many others: the protected industry is often small relative to the downstream industries that buy its output.

Effects on Households and Shoppers

For shoppers, tariffs usually mean higher prices, fewer choices, or both. When an import becomes more expensive, some shoppers switch to a domestic alternative, some switch to a different product, and some buy less. If the domestic alternative is more expensive or lower quality than the import was, shoppers are worse off even though they still buy something. If imports leave the market entirely, variety shrinks.

The CRS summarized research by economists at the New York Federal Reserve estimating that the tariffs in effect in 2018 cost the average U.S. household 414 dollars, and forecasting that the cost could grow to 831 dollars with the tariff increases then in place. Those are estimates for a specific set of tariffs at a specific time, not a permanent figure, and other studies using different methods reached different numbers. The direction, however, is consistent across most studies of the 2018 to 2019 round: households paid more.

Effects on Businesses and Supply Chains

Businesses are affected on both sides of the border. Importers and retailers face higher costs and thinner margins. Manufacturers that rely on imported parts face higher input costs, which can make their finished products less competitive at home and abroad. Exporters face retaliation, discussed below. But domestic producers that compete with the tariffed imports gain protection, at least in the short run.

The CBO emphasized this uncertainty channel in 2019, noting that uncertainty about future trade barriers leads some businesses to delay or forgo investment, or to make costly adjustments to supply chains. Over time, businesses adapt by finding new suppliers, redesigning products, or moving production, which is why the CBO projected that the economic effects of the 2018 tariffs would wane after 2020 as supply chains adjusted. Adaptation reduces the cost, but it is itself costly, and the new supply chain is rarely as efficient as the old one, or the business would have chosen it already.

Effects on Workers and Protected Industries

The clearest gain from a tariff goes to workers and firms in the protected industry. When imports become more expensive, domestic producers can sell more, raise prices, or both, and may hire more workers or invest in new capacity. This is the intended effect, and in the short run it often happens. The 2018 steel and aluminum tariffs, for example, were aimed at supporting domestic metal producers, and the CRS noted that the tariffs were expected to benefit those industries while raising costs for downstream users such as manufacturing and construction.

The harder question is what happens elsewhere. Workers in downstream industries that use the protected product as an input may face slower hiring or job losses as their employers’ costs rise. Workers in export industries may suffer if trading partners retaliate. Consumers who pay higher prices have less money to spend on other goods and services, which can reduce employment in those sectors. Economists therefore distinguish between jobs in the protected industry, which tariffs tend to support, and total employment, which may rise, fall, or stay roughly unchanged depending on the balance. Studies of the 2018 to 2019 tariffs generally found that gains in protected industries were outweighed by losses elsewhere, but estimates vary, and supporters of particular tariffs dispute the methods and conclusions of particular studies. Readers should treat any single jobs number, in either direction, with caution, and ask which industries it covers and over what period.

Government Revenue: Who Gains and What It Costs

Tariff revenue goes to the government imposing the tariff, and it can be substantial in absolute terms. As of August 5, 2019, the CRS reported, the United States had collected 32.7 billion dollars from the additional tariffs imposed in 2018 and 2019, according to U.S. Customs and Border Protection, all paid by U.S. importers. That money can fund public services or reduce the deficit, and the CBO noted that tariff revenues, by reducing the deficit, increase the resources available for private investment. That is a real offset to the costs described above, but it is partial: the revenue is a transfer from importers and buyers to the government, while the higher prices also cause some purchases not to happen at all, a loss that no one recovers.

Effects on Trading Partners and Retaliation

Tariffs do not stop at the border. The country whose exports are tariffed sees lower demand for its goods, lost sales, and pressure on its own producers and workers. Its government may respond in several ways: it may negotiate, it may accept the tariff and shift its exports to other markets, or it may retaliate with tariffs of its own on the first country’s exports. Retaliation was a major feature of the 2018 to 2019 round. The CRS reported that, as of mid 2019, retaliatory tariffs in effect covered approximately 93.2 billion dollars of U.S. annual exports, based on 2018 export data, targeting industries reliant on export markets and sensitive to price changes, such as agricultural commodities. The CBO likewise reported that retaliatory tariffs had been imposed on 7 percent of all U.S. goods exports, primarily industrial supplies and materials and agricultural products.

Retaliation changes the calculus for the country that imposed the first tariff. Its exporters, who had nothing to do with the original dispute, now face higher prices in foreign markets and may lose sales. Some manufacturers announced plans to shift production to other countries to avoid tariffs on U.S. exports, according to the CRS. Retaliation can also escalate: each round invites a counter round, and the eventual coverage can be far wider than the original dispute. This escalation risk is one reason trade disputes are often negotiated through the WTO or bilateral talks rather than left to successive tariff rounds.

The Bigger Picture: Growth, Investment and Inflation

Stepping back, tariffs affect the whole economy through a few main channels. First, they raise prices, which reduces purchasing power and real incomes. Second, they distort production and consumption: people buy less of the tariffed good and more of substitutes that they would not have chosen at undistorted prices, and resources flow toward protected industries even if other industries could use them more productively. Third, they create uncertainty that discourages investment. Fourth, they invite retaliation that reduces exports. Against those costs stand the gains to protected producers, the revenue to government, and any bargaining or security benefits.

The CBO’s 2019 assessment of the tariffs imposed since January 2018 illustrates how these channels combine. The agency projected that the higher trade barriers would reduce the level of real U.S. gross domestic product by roughly 0.3 percent by 2020 and reduce average real household income by 580 dollars in 2019 dollars, with the effects waning after 2020 as businesses adjusted supply chains, and falling to a 0.1 percent reduction in real GDP by 2029. The CBO stressed that these estimates were uncertain, because broad tariff increases in developed economies have been rare, making it hard to predict how exporters would adjust prices, how much importers would pass on, and how investment would respond. The agency also noted that the effects were small in aggregate because the value of imports subject to the tariffs was less than 2 percent of the value of all goods and services purchased by U.S. consumers and businesses, and warned that imposing higher tariffs on a wider array of items would have larger effects.

Winners and Losers in General Terms

It helps to summarize who typically gains and who typically loses, remembering that any particular tariff will have its own pattern:

• Domestic producers competing with tariffed imports usually gain, through higher sales, higher prices, or both.
• The government gains revenue, as long as imports continue.
• Domestic suppliers to the protected industry may gain if the protected industry expands.
• Households that buy the tariffed good usually lose, through higher prices or reduced choice.
• Businesses that use the tariffed good as an input usually lose, through higher costs and thinner margins.
• Exporters lose if trading partners retaliate, and may lose even without retaliation if a stronger currency or higher domestic costs make their goods less competitive.
• Workers in downstream and export industries may lose hours or jobs, offsetting gains in the protected industry.
• Foreign producers and their workers lose sales, though they may partly offset the loss by cutting prices or finding new markets.

The net effect is usually negative in standard economic models, because the losses to buyers exceed the gains to protected producers plus government revenue.

Examples: The 2018 to 2019 Round

The most studied recent example is the round of U.S. tariff increases beginning in 2018. The CBO reported that, since January 2018, the United States had imposed tariffs on 11 percent of goods imported into the country, measured as a share of the value of all U.S. imports in 2017. Some tariffs applied to imports from nearly all trading partners, including washing machines, solar panels, and steel and aluminum products. Others applied only to imports from China, covering about half of U.S. imports from China and targeting mostly intermediate goods and capital goods. The CRS reported that the tariff increases applied to date by August 2019 ranged from 10 percent to 45 percent and affected about 10 percent of annual U.S. imports, amounting to 267.5 billion dollars of imports using 2018 annual data.

The effects followed the pattern described above. Domestic metal producers gained protection. Downstream users faced higher costs: the CRS cited Ford’s estimate that the metal tariffs cost the firm nearly 1 billion dollars. Households faced higher prices, with the New York Federal Reserve research cited by the CRS estimating a 414 dollar average annual cost per household from the 2018 tariffs. Trading partners retaliated against about 93.2 billion dollars of U.S. exports. And the CBO projected a small but real drag on overall output and household income, fading over time as supply chains adjusted.

An older example often cited in textbooks is the Smoot-Hawley Tariff Act of 1930, under which the United States raised tariffs broadly during the Great Depression and trading partners retaliated.

Do Tariffs Work? The Contested Question

Asking whether tariffs “work” only makes sense once the goal is specified. If the goal is to raise government revenue, tariffs work in the narrow sense that they collect money, though they are a volatile and distortionary way to do it. If the goal is to protect a particular industry’s output and employment in the short run, tariffs often work, at a cost to buyers and downstream firms. If the goal is to raise overall economic growth, reduce the trade deficit, or bring back broad manufacturing employment, the evidence is much less favorable.

The trade deficit deserves a special note, because it is often cited as a reason for tariffs. A trade deficit means a country imports more goods and services than it exports. It does not by itself mean the country is losing money to foreigners in the way a household loses money when it overspends: the counterpart of a goods deficit is typically a surplus in investment flows, as foreigners invest in the tariff imposing country’s assets. Tariffs can reduce imports of the tariffed goods, but they do not reliably reduce the overall trade deficit, because exchange rates, saving and investment patterns, and retaliation adjust in offsetting ways.

Similarly, tariffs are sometimes presented as a way to punish foreign countries. As the incidence discussion shows, that framing is misleading when the tariff is paid by domestic importers and borne largely by domestic buyers. A tariff can pressure a foreign government by reducing its exporters’ sales, and that pressure is real, but it is purchased at a domestic cost, not imposed costlessly on the other side.

How to Read Tariff News in October 2026

Rates in force in October 2026 may change; this article gives no current rate forecast, so confirm any current rate in the Harmonized Tariff Schedule. When reading tariff news, five questions clarify most stories:

1. Which goods and countries are covered? A tariff on one product is a different event from a tariff on all imports from a country.
2. What is the rate, and is it additional to existing duties? Headline rates are often stacked on top of existing tariffs, so the total duty can exceed the headline.
3. How long will it last, and are there exemptions or exclusion processes? Temporary tariffs and tariffs with broad exemptions have smaller effects than permanent, comprehensive ones.
4. Has the trading partner retaliated, or threatened to? The export effects often matter as much as the import effects.
5. Who buys the tariffed good? A tariff on an input used by many domestic firms spreads more widely than a tariff on a finished luxury good.

Frequently Asked Questions

Do foreign countries pay U.S. tariffs?

No. U.S. tariffs are paid by the importer of record to U.S. Customs and Border Protection when goods arrive at a U.S. port. Foreign suppliers may bear part of the burden indirectly if they cut prices to keep sales, and U.S. buyers bear part through higher prices, but the payment itself is made domestically.

Do tariffs cause inflation?

They can contribute to higher prices, but they are not the same as general inflation driven by excess demand or monetary policy. A tariff raises the price of specific goods and of goods that use them as inputs. If tariffs are broad enough, the overall price level rises for a time.

Do tariffs protect jobs?

They tend to protect jobs in the shielded industry while putting pressure on jobs in downstream industries that use the protected product, in export industries hit by retaliation, and in sectors where consumers cut spending because prices rose. The net employment effect is therefore uncertain and contested, and it depends on the specific tariff.

Do tariffs reduce the trade deficit?

Not reliably. Tariffs reduce imports of the goods they cover, but exchange rates, saving and investment flows, and retaliation can offset that effect on the overall balance.

Are tariffs good or bad for the economy?

Standard economic models find that tariffs usually reduce overall economic efficiency, because the losses to buyers exceed the gains to protected producers plus government revenue. That finding does not settle every case: governments also weigh national security, bargaining leverage, and fairness concerns that are not captured in efficiency calculations.

Who benefits most from a tariff?

Domestic producers that compete with the tariffed imports benefit most directly, along with the government through revenue. Suppliers to those producers may benefit indirectly.

How long do tariff effects last?

Price effects appear quickly. Supply chain adjustments take longer, as firms find new suppliers or redesign products. The CBO projected that the effects of the 2018 tariffs would wane after 2020 as businesses adjusted.

Should I change my spending or business plans because of tariffs?

This article gives general information only, not personal financial or business advice. Households and businesses facing tariff driven price changes may want to compare suppliers, check whether a domestic alternative is genuinely cheaper at the new prices, and review official tariff schedules before making large purchasing decisions.

Sources & references

• Congressional Budget Office, "The Effects of Tariffs and Trade Barriers in CBO's Projections," August 22, 2019. https://www.cbo.gov/publication/55576
• Congressional Budget Office, "CBO's Updated Economic Forecast for the 2019-2029 Period," August 2019. https://www.cbo.gov/publication/55573
• Congressional Budget Office, "How CBO Projects Tariff Revenues," October 2024. https://www.cbo.gov/system/files/2024-09/60692-Tariffs.pdf
• Congressional Research Service, "Escalating U.S. Tariffs: Affected Trade," Insight IN10971, updated August 16, 2019. https://www.congress.gov/crs_external_products/IN/PDF/IN10971/IN10971.11.pdf