In recent years, tariffs have returned to the forefront of economic and political discussions, particularly as the United States has significantly increased their use as a policy tool. Understanding what tariffs are and how they function is essential for anyone seeking to comprehend modern trade policy.

Defining Tariffs

A tariff is a tax imposed by one country on goods or services imported from another country. While the term can technically apply to export taxes as well, import tariffs are by far the most common type, and they’re what most people mean when discussing tariffs in the context of US policy.

Tariffs typically come in two main forms: specific tariffs, which impose a fixed dollar amount per unit of imported goods, and ad valorem tariffs, which are levied as a percentage of the imported good’s value. For example, a specific tariff might add $1,000 to each imported car, while an ad valorem tariff might add 10% to the value of each imported vehicle.

How Tariffs Work

When goods cross US borders, the importing company pays the tariff directly to US Customs and Border Protection as part of the import process. This payment occurs before the goods can enter the domestic market.

The economic mechanism is straightforward: by adding a tax to imported goods, tariffs make those products more expensive relative to domestically produced alternatives. This price increase is intended to encourage consumers to buy local products instead, theoretically stimulating the domestic economy and protecting local industries from foreign competition.

Current US Tariff Policy

The United States has dramatically expanded its use of tariffs since 2025. Under the current administration, the average applied US tariff rate rose from 2.5% in January 2025 to an estimated 27% by April 2025, the highest level in over a century. Following subsequent negotiations and adjustments, the rate was estimated at 17.4% as of September 2025.

The administration has employed multiple legal authorities to impose these tariffs:

Section 232 National Security Tariffs: The president has invoked Section 232 of the Trade Expansion Act to impose tariffs on steel, aluminum, and copper products, as well as automobiles and parts. Steel and aluminum tariffs were raised to 50%, while a 25% tariff was introduced on imported cars from most countries.

Reciprocal Tariffs: On April 2, 2025, the president declared a national emergency and invoked the International Emergency Economic Powers Act to impose a 10% baseline tariff on nearly all countries, effective April 5, 2025. Higher country-specific tariffs ranging from 11% to 50% were applied to 57 countries beginning April 9, 2025. These rates were calculated by dividing the US trade deficit with each country by total goods imported from that country in 2024, then dividing that number by two.

Sector-Specific Tariffs: The administration has announced or implemented tariffs targeting specific industries. A 100% tariff on branded or patented pharmaceutical products is set to take effect October 1, 2025, with exemptions for companies building manufacturing plants in the US. Additional tariffs have been announced on heavy trucks (25%), kitchen cabinets and bathroom vanities (50%), and upholstered furniture (30%).

Exemptions: The executive orders exempt more than 1,000 products, including petroleum, critical minerals, metals, rare earths, and organic and inorganic chemicals.

The Stated Goals

The administration has articulated several objectives for these tariffs, including addressing trade deficits, encouraging domestic manufacturing, and applying pressure on foreign governments regarding issues like illegal immigration and drug trafficking. By September 2025, tariffs represented 7% of federal revenue compared to 2% historically.

Economic Impact and Considerations

The economic effects of tariffs are complex and multifaceted. Economic analyses generally find that tariffs distort free markets and increase prices of both foreign and domestic products.

Who Bears the Cost: While tariffs are sometimes described as a tax on foreign businesses, the costs are often borne by consumers in the country imposing them. A literature review found that US consumers and firms bore the brunt of costs in recent trade disputes, with most studies finding that prices increased by the amount of the tariff or more.

Effects on Different Groups: The distributional effects tend to be regressive, burdening lower-income households more than higher-income households, because lower-income taxpayers spend a higher share of their income on goods affected by tariffs. Analysis estimates the tariffs amount to an average tax increase of nearly $1,300 per US household in 2025.

Supply Chain Disruptions: Many American businesses operate with global supply chains. Tariffs on intermediate goods used in production can erode producers’ profits and raise the prices they charge consumers.

Trade Retaliation: Trading partners have responded with retaliatory measures. For example, the European Union released a list of $84 billion worth of US goods that would face retaliatory tariffs, though these were subsequently delayed.

Economic Growth: The Congressional Budget Office notes that the effect of tariffs on output can be ambiguous, with some factors increasing GDP while others decrease it. However, most economists agree that free trade tends to increase economic growth more than protectionist policies.

International Responses

Countries have responded to US tariffs in various ways. Between April and August 2025, the administration reached framework agreements with the United Kingdom, European Union, and Japan, and implemented a temporary tariff truce with China. Other nations have pursued bilateral negotiations, filed complaints with the World Trade Organization, or implemented retaliatory measures.

Historical Context

Tariffs have played different roles throughout US history. From the founding of the United States until 1914, when the federal income tax was introduced, tariffs were the main source of revenue to the federal government. After World War II, the US joined the General Agreement on Tariffs and Trade with 22 other countries and began decreasing tariffs to promote international trade. This trend continued for decades, with tariffs falling to relatively low levels before the recent increases.

Looking Forward

The current tariff regime represents a significant departure from decades of trade liberalization. Whether these policies achieve their stated goals, what their long-term economic consequences will be, and how they shape America’s relationships with trading partners remain open questions that will likely be debated by economists, policymakers, and business leaders for years to come.

As George Bogden and other analysts have observed, the international trade landscape is undergoing its most significant transformation in generations. Understanding tariffs and their implications is crucial for businesses, consumers, and anyone interested in economic policy. For those seeking more detailed information, the Congressional Research Service and the Peterson Institute for International Economics offer comprehensive analyses of ongoing trade policy developments.