What are tariffs and why are they used?
A tariff is simple: it’s a tax on imported goods. Companies and importers have to pay this tax on physical items like cars, electronics, clothing, or food. The tax gets paid when those items cross an international border.
Let’s take a simple example—and this is very simple. Imagine that companies in Canada and Japan both make cars and the countries trade with each other. So in Canada, they make cars for Canadians and Japanese; in Japan, they make cars for Japanese and Canadian customers.
Now imagine that Canada imposes a 25% tariff on imports of cars from Japan. What happens?
With the tariff, anyone who wants to bring a Japanese car into Canada must pay a 25% tax on the value of that car. That means that Japanese cars sold inside Canada will be more expensive, compared to Canadian-made cars sold inside Canada. And of course the Canadian government would collect money. That’s what a tariff does. It raises the price of imported goods and it provides money to the government.
History of tariffs
Tariffs have a long history. In ancient and medieval times, most private wealth was generated by land. The richest and wealthiest people in society were landowners. And so monarchs and rulers—the kings and queens—they got money by taxing landowners. And this was relatively easy: land doesn’t move, so monarchs’ agents could stop by to collect taxes.
But in about the 12th century, a merchant class started to emerge. Merchants didn’t make money by owning and farming land; they made money by trading goods, by buying from one person and selling to another.
This was a new way of making money. And so monarchs and rulers needed a way to tax this new type of wealth. That new way was the tariff. Any merchant who brought goods from the outside world had to pay a tax on those goods. The taxes went to the government.
For a long time, tariffs were an important way for governments to raise money. In fact, one of the first things the brand-new United States government did in 1789 was to impose tariffs on imported goods. It needed the money.
But the world continued to change, and tariffs soon were not enough. You can guess why: economies developed and became more advanced. Services emerged. A hairdresser, an accountant, an attorney, a journalist: all these people were making money, but paying few taxes because they didn’t own land and they didn’t import goods.
So governments found new ways to raise money—the income tax, sales taxes, the value added tax, and so on.
Today, tariffs don’t raise much money—at least not compared to other forms of taxation. But there is another reason that governments impose tariffs, and that is to protect their own industries.
Tariffs as protection
Here’s how that works. Let’s go back to our example of Canadian and Japanese cars. If Canada imposes a tariff of 25% on Japanese cars, then Japanese cars would get more expensive inside Canada’s borders. So naturally, Canadians would be more likely to buy cars from Canadian companies, because they would be a better value. And Canadian car companies would be very happy: they would produce more cars, they would hire more Canadian workers, they would make more profits for their Canadian owners.
Politicians would claim credit for saving Canadian jobs. They would have their photographs taken at ribbon-cutting ceremonies when new car factories open. This is why tariffs exist today: they protect manufacturers of goods from competition from other countries. Think of it from the other side, though. The Japanese companies wouldn’t be happy about this new tariff at all—but hey, they don’t vote in Canadian elections.
Other reasons
Tariffs can also be used defensively. If one country believes another country is acting unfairly in trade, then it can impose a tariff in retaliation. A good real-world example of this is a dispute between the U.S. and the European Union about airplanes. Europe thinks the U.S. unfairly subsidizes Boeing; the U.S. thinks Europe unfairly subsidizes Airbus. And so each side imposes tariffs on the other to protect their own side.
Finally, tariffs can be used to punish other countries for non-trade-related disputes. Advocates for environmental protection and human rights make a moral argument. They advocate for tariffs against countries that don’t have sufficient laws to protect the environment or human rights.
Who pays tariffs?
So we know that tariffs are a tax on external goods. A common question is, who pays for a tariff?
There are two ways to answer that question. Start with the most literal way to answer it. The party that pays a tariff is the party that brings goods across the border.
Tariffs are settled at a port of entry. A port of entry might be a seaport, an airport, or a land crossing. When goods cross the border, the party bringing the goods across must declare the value of those goods to a customs agent. And tariffs are assessed right then and there.
But when people ask, “who pays for tariffs?” they don’t usually mean to ask who transfers the money to the government. They mean, “who loses economically from tariffs?”
That’s where things get more complicated. Advocates of tariffs say that foreign companies pay the tax. Opponents of tariffs say the same thing—but add that those companies raise prices in response. That means local buyers ultimately lose out. They have to pay higher prices for goods that come in from abroad.
And there is also less consumer choice. Many foreign companies decide not to sell into a country that has high tariffs—so some foreign products might not be available at any price.
Future of tariffs
In general, tariffs have been declining for about 75 years. Twenty-three nations signed a treaty in 1947 that lowered tariffs and other barriers to international trade. That became the World Trade Organization in 1995. Today, 166 countries have joined the WTO, which regulates trade. Over many years, tariffs, quotas, subsidies, and other barriers to trade have gradually fallen—not to zero, but they have fallen.
Some countries use tariffs and trade barriers more than others. Big producing nations like India, Brazil, Russia, and Argentina tend to have high tariffs and barriers to trade. Smaller trading nations like Singapore, Switzerland, Hong Kong, and New Zealand tend to have lower trade barriers.
The U.S. has traditionally argued for lower tariffs and lower barriers to trade between nations. But that is starting to change. Donald Trump has said that “tariff” is “the most beautiful word in the dictionary” and has made tariffs a central part of his foreign policy.
Jeff’s take
Google has a tool called Trends, where you can see how popular a search term has been over time. So I typed in “tariff” and set the time period to 2004 to the present—that’s as long as Google publishes data.
“Tariff” as a search term is at its most popular now. There was a small spike in 2018—but today, it’s about four times more popular than at any other point since 2004. I tried it with the Spanish word, and the effect was even more pronounced.
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