A Vox reader asks: Can you explain how tariffs work? How will imposing tariffs impact the everyday lives of Americans?
According to President Donald Trump, “tariffs is the most beautiful word in the dictionary,” surpassed only by God, religion, and love.
Trump has also claimed, as he did shortly after his inauguration, that “tariffs are going to make us rich as hell” and will “bring back businesses that left us.”
Basically, to hear Trump tell it, tariffs are magical things that make everyone’s lives better.
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The short answer is no. Tariffs aren’t a magic wand, but a complex — and potentially dangerous — economic tool that could make life more expensive and difficult.
An aggressive set of tariffs were announced at the beginning of February: 25 percent on all Mexican and Canadian goods on Saturday, as well as a new tariff of 10 percent on all Chinese goods.
For a moment, the North American continent seemed on the brink of a trade war. But for now, the tariffs on Mexico and Canada have been postponed for 30 days.
The new tariffs on Chinese-made goods, however, are still on, and more tariffs could be on the way: Trump has talked about potential tariffs on the EU as well. And that makes it important for people to understand tariffs and how they might affect life in the US.
Let’s start with the basics: A tariff is a kind of sales tax federal governments levy at ports of entry that applies to imported goods, paid by the entity (usually a company) that imports that good. Study after study has shown that companies pass these costs on to their customers.
Tariffs are generally calculated as a percentage of the cost of a good; if you have a 25 percent tariff, that means the cost of the tariff is 25 percent the cost of the good.
Typically, a government, say the US government, sets a tariff on a certain good or class of goods made abroad. When that good reaches a US port of entry, the company importing it has to pay the government before they can receive it.
Historically, tariffs have tended to apply only to certain countries, and only certain goods from those countries. For example, the Biden administration put targeted tariffs on batteries, electric cars, and solar panels being made in China, citing economic and national security concerns.
What’s unusual about Trump’s proposed tariffs is that they’re on all goods from entire countries. The 25 percent tariff on Canada wasn’t just on maple syrup to protect producers in Vermont — it was to be on everything that country makes.
The other strange thing about the Trump tariffs is that they don’t account for what are known as de minimis exemptions. These are carve-outs on tariffs for items below a certain price point, usually cheap goods that are too small for the government to worry about.
Those exemptions are what allow companies like Shein and Temu to operate. But Trump’s new tariffs eliminate that exemption.
How would Trump’s tariffs affect Americans?
The effect of any tariff depends on which country the tariffs target, what goods they produce, as well as whether and how they retaliate. But one analysis from the Tax Foundation found that Trump’s proposed tariffs on Mexico, Canada, and China, if they all were to go into effect, would cost the average American household $800 this year.
Tariffs targeting Mexico and Canada would also have a particularly acute economic impact. North American trade agreements have allowed companies to treat the US, Canada, and Mexico like one country for decades — and many companies have built supply chains and lines of business around there being relatively free movement of goods. The looming Trump tariffs — as well as any reprisals — would make that level of integration impossible to maintain, and that would mean higher prices, and could even force companies out of business.
Take the auto industry as an example.
Say Ford makes the windshields for one of its truck in Canada, then installs those windshields in the US, sends the truck frame to Mexico for motor installation, then brings the truck back to the US for final assembly and sale, and all of those countries have 25 percent tariffs on each other — that’s four 25 percent tariffs.
That level of tariffs would make it impossible for Ford to continue building that truck that way. Likely, it would try to keep that product line alive by consolidating manufacturing. As a business intent on making money, it would probably try to do so in the least expensive way possible, which would likely mean moving factories out of the US. And that would mean an acceleration in the decline of American manufacturing, as well as a decline in the number of available US-based jobs.
In the short term, the consumers would have to pay a lot more for that truck to cover the costs of those four tariffs, and in the long term, more to cover the costs of moving manufacturing. And that is in the best case scenario. In the worst case, again, the tariffs become so onerous so quickly that Ford has to shut down, taking many American jobs with it.
The bottom line is this: At best, tariffs will mean you will need to pay more for goods and services than you do now. And at worst, they could create large economic disturbances.
Dylan Matthews contributed reporting. For more from Explain It to Me, check out the podcast.
