Key takeaways:
- Tariffs are an extra tax charged on imported goods coming in from another country.
- Tariffs lead to higher consumer prices as companies charge more to make up for the extra tax.
- Governments might set up tariffs to generate extra tax revenue, protect domestic companies, and create local jobs.
When you shop online or at a store, some of the products you see may come from another country. However, international companies often can’t freely sell their goods in the U.S. without some extra steps.
International companies must first get their goods through customs by meeting the local government’s rules, taxes, and fees.¹
Tariffs are one of the charges that could be added to foreign goods sold in the U.S. If you’re wondering “what is a tariff?” and how tariffs might impact you, here’s what to know.
Tariffs are a tax on international goods coming from another country, also known as “imports.”
The government charges this tax, usually a percentage of the product’s value, as the goods pass through customs. (Customs is the agency in charge of allowing goods and people through a nation’s borders.) Only after the tariff is charged can the goods be sold to customers.
A quick example of a tariff
Let’s look at a basic tariff example:
The U.S. imposes a 10% tariff on all goods from Japan. A Japanese electronics company then ships $1 million of products to the U.S.
The U.S. government will charge $100,000 in taxes up front before the $1 million of goods can be sold to U.S. customers.²
How do tariffs work?
Each country sets its tariff rates. These rates can:
- apply to every other country
- apply to certain countries
- only apply to certain goods
For instance, a country can decide to place tariffs on computer chips but not oil.²
Why would a country impose tariffs?
A government might impose tariffs to:
- raise tax revenue
- protect domestic manufacturers against competition
- negotiate for future trade agreements
Other countries might agree to more favorable terms in exchange for the removal of tariffs.
Who pays tariffs?
At first, the international company pays the entire tariff to get its products across the border. After paying the tariff, companies can then set their prices however they want.
Companies can increase their prices to include some or even all the extra tariff charges. For this reason, consumers often cover the tariff cost in the long term, even if they don’t pay the government directly.
If you purchase goods that have recently had tariffs imposed, you may need to increase your monthly budget to account for higher prices.
Who benefits from tariffs?
By design, a tariff makes international products more expensive. This can help domestic companies with the same product, as they gain a pricing advantage.
U.S. companies might sell more and hire more employees because of tariffs.³
Are tariffs good or bad?
Now that you understand what a tariff is, let’s look at the impacts. Tariffs are a government policy tool with both potential benefits and drawbacks.
Benefits of tariffs
- Protect domestic companies: Governments can use tariffs to support domestic suppliers and manufacturers. For example, in early U.S. history, British manufacturers would flood the country with cheap goods, which risked putting American companies out of business.⁴ By setting up tariffs, the U.S. government allowed local companies to grow and develop.
- Can create local jobs: Tariffs don’t apply to goods produced within a country, even if the company is international. For example, if a Japanese company builds cars in the U.S., it wouldn’t owe tariffs. Tariffs can motivate international companies to create more local factories and jobs.
- Improve self-sufficiency: If a country relies too much on foreign imports for key goods, like steel or medicine, and the other country cuts off the supply, it can create shortages. Tariffs can potentially keep some production of essentials local to improve economic self-sufficiency.
- Generate extra tax revenue: As a tax, tariffs bring in extra money for the government. The government could use the money to lower other taxes, like income taxes, or to pay for roads, the military, and other projects.³
Drawbacks of tariffs
- Leads to higher prices. Tariffs are taxes that drive up costs, especially for consumers. For decades, free trade agreements led to lower tariffs in the U.S., making buying products from other countries easier and more affordable.⁵
- Reduces product selection. Tariffs can interrupt foreign trade. When a country has high tariffs, international companies may decide it’s not worth selling there. Products created by other countries end up less common or aren’t available anymore.
- Creates problems for companies using international supplies. U.S. factories and manufacturers use parts from around the world, even if they create the final product domestically. Tariffs could increase production costs and make it harder to run a successful business, leading to possible layoffs.
- May hurt local businesses that sell abroad. Countries tend to “return fire” with tariffs. If the U.S. adds tariffs on international companies, those other countries may charge similar fees on American companies, hurting their sales.²
How tariffs can affect prices
Tariffs can immediately lead to extra costs on products from other countries. This change can affect prices in a few ways.
Higher prices for imported goods
The most immediate impact? Prices increase for goods hit by the tariff. Retailers and other companies may pass the extra costs straight to consumers.
There are a few ways retailers can try reducing the impact of tariffs on prices. For instance, if China is impacted by tariffs, a local store could buy products from another country, like Vietnam, to avoid the charge. Stores could also stockpile supplies before the tariffs begin.
Still, retailers only have so much wiggle room. Here’s how to save money so you can prepare for costs possibly going up.
More demand for domestic products
As noted, tariffs can make domestic products look more appealing cost-wise. However, factories, farms, and other companies can only create so much.
As more people shift to buying domestic products, the domestic companies could increase their prices because they don’t have enough inventory.
What goods are most likely to be affected by tariffs?
Tariffs drive up costs, especially on products the U.S. does not or cannot produce. Here are some of the goods most likely to be affected because they mainly come from other countries:
- Electronics like TVs, computers, and smartphones
- Foods that are grown elsewhere, like bananas, coffee, and chocolate
- Imported beer, wine, and spirits
- Clothing and shoes
- International car brands
- Furniture⁶
How to prepare for tariffs
If you’re concerned about tariffs and the potential increase in costs, these budget and financial tips can help you prepare.
- Pay more attention to prices and deals. When you shop, pay attention to products that may increase in price more than others. For example, bananas might become more expensive as they aren’t grown in the U.S. However, apples are grown in the U.S., so prices may stay more stable. If you notice something you use frequently at a low price, consider stocking up.
- Cut back on optional spending. Think of what purchases you could delay: home renovations, vacations, eating out, or buying a new car. Those purchases could be more expensive if tariffs are high for foreign products. It may be worth waiting to see if prices go down. Cutting back also gives you extra cash in case the cost of essentials goes up.
- Maintain an emergency fund. An emergency fund should have between three and six months of living expenses saved up. Having that cash buffer can help you manage surprise price jumps.
- Keep your money in a high-yield savings account. If your bank balance isn’t earning much interest, you’ll have even less to cover the tariffs. A high-yield savings account can earn substantially more than the typical account, giving you extra spending power.
Navigating tariff uncertainty
Tariff rates, like government policies, change over time. Plan as best as you can until conditions improve. By saving money, comparing prices, and using the right savings account, you can prepare for tariffs.
Use this budget calculator to see how your finances might change with new tariffs.
Tariff FAQs
Are tariffs permanent?
No, the government can adjust tariffs. Some last for years, others are lifted quickly once trade deals are reached.
Do tariffs apply to services or just physical products?
Tariffs are generally for physical goods crossing borders, like cars, clothes, and electronics. Tariffs don’t typically affect services like streaming, online courses, IT tech support, or software.⁷
What’s the difference between a tariff and a sales tax?
A tariff is charged to a foreign company when its goods enter another country. These taxes go to the federal government. A sales tax is something you pay as a consumer when buying something, with the money going to a state or local government. Tariffs apply only to goods from another country, while sales taxes apply to domestic and international products.⁸