If you are financially aware, I bet you might have heard the term tariffs and probably know their meaning too. Recently with the change in the US administration in 2025, this term has been bouncing a lot in the world economy.
Every other day, you will hear that some country has retaliated against some other country with reciprocal tariffs. This has led to the potential cause of the tariff war among countries, which will certainly lead to higher prices of imported goods and the availability of reduced variety among consumers. Continue reading to further understand what they truly mean, what are their types, and what you should be doing in such a situation.
What are tariffs?
Basically, tariffs are taxes imposed on imported goods and services by one country on the other.
The government decides tariff percentages as a protectionist measure to safeguard its domestic manufacturers from rising competition. At the same time, because of this, imported products become more expensive than domestic ones, leading to challenges for consumers.
For instance, in February 2025, U.S. President Donald Trump implemented a 25% tariff on imports from Canada and Mexico and a 10% tariff on imports from China. Furthermore, there is a 10% tariff on energy resources from Canada.
Their main purpose is to make the foreign or exported goods more expensive or available in limited quantities so as to promote their domestic supplies.
Who collects a tariff?
In general, tariffs are paid to the customs officials of the country who had imposed the tariff. It is one of the multiple trade policies that a country can enact.
For instance, tariffs on imports from the USA are collected by Customs and Border Protection who acts on behalf of the commerce department.
One thing that we need to recognize is that the taxes owed on imports are compensated by the domestic customers buying the product and not imposed directly on the foreign country’s exports. This is not just one way in which consumers face challenges; if the domestic manufacturers are using foreign goods or components in their production process, the increased cost is going to be passed on to the customers only.
Why does the government impose tariffs?
Tariffs are often used to help new or growing industries, especially in developing countries, by making foreign products more expensive and giving local businesses a chance to compete. However, even wealthy countries with strong industries sometimes use tariffs to protect their own businesses from foreign competition.
In short, tariffs can be a tool for both emerging and established economies, but their purpose depends on the situation. Here is a list why the government may impose tariffs:
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To raise revenues
The prime reason behind implying tariffs is raising revenues for the government. It is also known by the term revenue tariff and is not curated to restrict imports.
For example, president Donald Trump and his administration in 2018 and 2019 imposed tariffs on several items to rebalance the trade deficit. This led the US government to receive custom duties of $41.6 billion and $71.9 billion in the year 2018 and 2019.
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To safeguard domestic industries
Another big reason why governments impose tariffs is to protect domestic industries from foreign competition. By making imported goods more expensive, tariffs encourage consumers to buy locally produced items. This helps local businesses grow and keeps jobs within the country. For example, a tariff on imported steel can support domestic steel manufacturers by reducing competition from cheaper foreign steel.
Tariffs also shield emerging industries that may struggle to compete globally. By providing this protection, governments give these industries time to develop and become competitive. This ensures long-term economic stability and preserves jobs in key sectors.
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To protect domestic consumers
Also, tariffs help in protecting domestic consumers by ensuring safer and higher-quality products. This is especially important for products that may not meet safety or environmental standards, such as items made with harmful materials or under poor working conditions.
Additionally, tariffs can discourage the import of unsafe or low-quality goods. For example, a tariff on products with hazardous materials, like lead-based paint, makes them less affordable. This pushes consumers toward safer, domestically produced options, making sure their well-being is supported and supporting local industries.
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To protect the national interest
Tariffs can serve as a tool to protect national interests and enforce foreign policy. By imposing tariffs on specific imports, governments can exert economic pressure on other nations. For instance, during geopolitical conflicts, tariffs may be used to discourage trade with adversarial countries, safeguarding national security and promoting domestic priorities. This approach helps maintain economic independence and supports strategic goals.
Common types of tariffs
Here is a list of some of the most common types of tariffs a government usually employ:
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Specific Tariff
It is a fixed fee charged on one unit of an imported good and is referred to as a specific tariff. However, this tariff can differ as per the type of goods imported.
For instance a country could demand $30 tariff on a pair of shoes imported and $300 tariff on each computer imported.
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Ad Valorem Tariff
An ad Valorem tariff is a tax on imported goods based on their value. It’s calculated as a percentage of the item’s price. For example, if a country imposes a 10% Ad Valorem tariff on a 1,000 product, the importer pays an additional 100. This type of tariff adjusts with the product’s price, ensuring the tax remains proportional to its value.
Non-tariff trade barriers
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Licenses
A license is a sort of permission granted to a business by the government that allows it to import a certain good into the country.
Imagine a scenario where there is a restriction on certain cheeses, and then the government would grant licenses to particular companies, allowing them to act as importers.
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Import Quotas
An import quota is a kind of restriction placed on the quantity of goods that a company can import. Barriers of this type are mainly associated with the issuance of licenses.
For example, a country might impose an import quota barrier on the amount of citrus fruits that can be imported in a single year.
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Voluntary Export Restraints
A voluntary export restraint (VER) is a trade limit set by an exporting country, often at the request of the importing country. It restricts the quantity of goods exported to protect the importing nation’s domestic industries. For example, Country A might limit car exports to Country B, reducing competition for Country B’s car manufacturers. While “voluntary,” VERs often result from negotiations and can lead to higher prices for consumers.
Who benefits from tariffs?
Tariffs primarily benefit governments and domestic industries. Governments earn revenue from the taxes imposed on imported goods. Domestic industries gain an advantage as tariffs make foreign products more expensive, which further helps in reducing competition and encouraging consumers to buy locally made goods. This helps protect jobs and supports local businesses.
However, tariffs often hurt consumers. Higher import costs lead to increased prices for imported goods, affecting both individuals and businesses. For example, if tariffs raise the price of raw materials, businesses may pass these costs onto customers which makes everyday products way more expensive.
In the long run, tariffs can have mixed effects. While they protect domestic industries initially, reduced competition may lead to inefficiency and slower innovation. Over time, this can harm both businesses and consumers, as prices remain high and quality may not improve.
Conclusion
Tariffs remain a key tool in trade policy, but their use has declined with the rise of globalization and organizations like the World Trade Organization (WTO). These promote free trade and discourage excessive tariffs. Today, countries often rely on non-tariff barriers, such as quotas or export restraints, to protect domestic interests. While tariffs can benefit governments and local industries, they also impact consumers and global trade dynamics, making their application a balancing act in modern economies.
