US President Donald Trump slapped tariffs on major US trade partners, including Canada, Mexico, and China. Citing a “major threat” posed by illegal immigration and drug trafficking, Trump invoked emergency economic powers to implement the tariffs.

Starting Tuesday, Canadian and Mexican goods exported to the US will face tariff. Additionally, China, which already faces tariffs, will incur an extra 10 per cent duty on its goods.

As Trump imposes 25 per cent tariff on Canadian and Mexican imports and 10 per cent on goods from China, it is important to understand what exactly are tariffs meant for.

What are tariffs?

Collected by Customs and Border Protection agents in the United States, tariffs are originally charged as a percentage of the price a buyer pays a foreign seller. Tariffs are collected at 328 ports of entry across the US.

Varying tariff rates: For instance, tariffs are generally 2.5 per cent on passenger cars and 6 per cent on golf shoes. Now, tariffs can be lower for countries with which America has trade agreements.

Among US, Mexico and Canada, goods can be transported tariff-free because of Trump’s trade agreement.

Mainstream economists, according to The Associated Press, are usually skeptical of tariffs and consider them to be a mostly inefficient way for governments to raise money and promote prosperity.

Who actually pays tariffs

US President Donald Trump has insisted that tariffs are paid for by foreign countries. However, it is the importers, American companies, that pay tariffs and that money goes to the US Treasury.

Now these American companies balance out their higher costs by passing them on to their customers in the form of higher prices. Which is why economists say that consumers usually up footing the tariffs bill.

Tariffs can be harmful for foreign countries as they can make their products expensive and thus making them harder to sell abroad.

When imposed, foreign companies try to offset tariffs and to maintain their market share in the US, they might have to cut prices and sacrifice profits.

Yang Zhou, an economist at Shanghai’s Fudan University, concluded that Trump’s tariffs on Chinese goods caused more than three times as much damage to the Chinese economy as they did to the American economy.

‘Tariff Man’ Trump

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

During his presidential campaign last year, Trump said, “Tariffs are the greatest thing ever invented.”

Trump as president imposed tariffs with a flourish, which targets imported solar panels, steel, aluminium and pretty much everything from China. “Tariff Man,” Trump called himself.

In recent years, the US has gradually stepped back from its post-World War II role of promoting global free trade and lower tariffs. And this has been a response to the loss of US manufacturing jobs, which is widely accredited to unchecked tree trade and increasingly powerful China.

Tariffs protect domestic industries

Increase in imports price can let tariffs benefit and protect home-grown manufacturers. They also serve as a punishment to foreign countries for undertaking unfair trade practices such as subsidising exporters or dumping products at lower prices.

Prior to the establishment of federal income tax in 1913, tariffs drove major revenues for the government. From 1790 to 1860, tariffs accounted for 90 per cent of the federal team, as per Douglas Irwin, an economist from the Dartmouth College who studied history of trade policy.

When global trade caught fervor after World War II, tariffs fell out of favour. The US government needed vastly bigger revenue generating streams to finance its functioning and operations.

The fiscal year that ended September 30, 2024, the government collected a total of $80 billion in tariffs and fees. This is a lower amount when compared to the $2.5 trillion that comes from individual income taxes and the $1.7 trillion from Social Security and Medicare taxes.

Even then, Trump wants to bring into effect a budget policy that resembles the one that was in place in the 19th century.

Tariffs can also be used as a way of threatening or pressurising other countries on issues that may or even may not be related to trade deals.

Trump’s recent imposition of tariffs on Canada, Mexico and China are meant to address what he called a “national emergency” over illegal immigration and fentanyl.

The US president has also pledged to use tariffs to boost domestic manufacturing and raise revenues for the federal government.

Trump had earlier, in fact, even said that if a country tries to start a war, then he would issue a threat: “We’re going to charge you 100% tariffs. And all of a sudden, the president or prime minister or dictator or whoever the hell is running the country says to me, ‘Sir, we won’t go to war.’ ”

Tariffs considered ‘self-defeating’

Tariffs increase costs for companies and consumers relying on imports and they also provoke some kind of retaliation.

For example, the European Union hit back against Trump’s tariffs on steel and aluminium by taxing US products, from bourbon to Harley-Davidson bike.

Similarly, China also responded to the US by slapping tariffs on American goods like soybeans, pork, etc.

Economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard and the World Bank conducted a study and concluded that Trump’s tariffs failed to restore American job markets.

The study found that the tariffs were “neither raised nor lowered US employment” where they were meant to protect jobs.

For instance, even after Trump’s 2018 taxes on imported steel, the number of jobs at the US steel plants barely changed.

In fact, retaliatory taxes from China and other nations have only had “negative employment impacts”, especially for farmers, the study found. Trump’s tariffs have also played a role in damaging companies that relief on targeted imports.

(with AP inputs)