On April 2, 2025, US President Donald Trump imposed sweeping tariffs on major trading partners, heightening global trade tensions. China is now subject to a 34% tariff, the European Union to 20%, and India 26% under a “discounted reciprocal tariff.” These affect industries like automobiles, dairy, steel, and electronics. Although the Trump administration contends these actions shield American industries, experts say they will drive inflation, destabilize world trade, and trigger retaliatory measures.
But what are tariffs? Why do countries impose them? Who really pays the price? Let‘s delve into the answers to these questions.
What Are Tariffs and Why Do Countries Use Them?
A tariff is a tax levied by a government on imported services and goods. Whenever businesses or people import items into a nation, they pay the tax to the government at the customs. Though the tariff is originally levied on the importer, its burden tends to percolate to businesses, producers, and customers in the guise of elevated retail prices.
Tariff play several roles, shaping trade policy, economic protectionism, and the revenue of governments.
Why Governments Charge Tariffs?
– Sheltering Domestic Industries: Increased import expenses promote domestic manufacturing and lower the dependence on imports.
– Raising Revenue: Tariffs generate government revenue, especially in economies with limited alternative bases for taxation.
– Correcting Trade Imbalances: These serve to discourage surplus imports and curtail trade deficits.
– Retaliation and Bargaining: Tariffs are employed by governments as a bargaining tool in trade conflict or as retaliation against unjustifiable trade practices.
Trump’s new tariff action qualifies under all of these categories. His administration intends to increase manufacturing in the United States, provide federal revenue, and reduce trade deficits with India, China, and the EU.
Types of Tariffs
Governments implement various types of tariffs based on their economic objectives:
Ad Valorem Tariffs: A rate of a proportion of an article’s value (e.g., a 10% tax on a $1,000 item equals a $100 tariff).
Specific Tariffs: A set price per unit of an imported commodity (e.g., $5 per kilo).
Compound Tariffs: An amalgamation of both (e.g., 5% on the value of a product, plus a charge of $2 per unit).
How Tariffs Impact Different Sectors?
Tariffs have diverse effects on various sectors depending on their importation and international value chain dependency:
Automobile Sector: Increased tariff on foreign vehicles and auto parts make them costlier for buyers, favoring domestic automobile companies.
Steel & Aluminum: Increased tariff on imported metals increases the cost for industries such as construction, defense, and manufacturing.
Technology & Electronics: China, which is one of the biggest suppliers of semiconductors and electronic parts, is subjected to increased tariff, which can lead to higher prices for smartphones, laptops, and other devices.
Agriculture: Retaliatory tariffs tend to target US farmers. If China or the EU charges tariffs on US soybeans, corn, or dairy, American farmers lose access to important markets.
Who Pays Tariffs?
Even though tariffs are levied upon importers, their economic weight is broadly allocated:
- Importers pay tariff upon entry, but they typically re-pass the charge to retailers and consumers.
- Consumers ultimately have to pay increased prices for tariffs-affected products.
- Foreign exporters occasionally reduce prices to stay competitive, swallowing some of the cost.
- Domestic producers can gain less foreign competition but also must pay more for imported raw materials.
For example, numerous firms are relocating production away from China to India, Vietnam, and Mexico to escape US tariffs. Others request exemptions if no replacement suppliers are available.
The Role of the World Trade Organization (WTO)
The WTO governs global trade and resolves tariff disagreements. Tariffs are legally allowed to be imposed by countries in specific situations, like anti-dumping duties or national security reasons.
The US has also accused China of unfair trade practices like technology theft and forced transfers on several occasions. The WTO, however, has adjudicated against some tariffs imposed by the US as being against global trade rules.
What Are Reciprocal Tariffs?
A reciprocal tariff is where a country charges the same rate of tariff as another country does on its imports. For instance, if India charges a 20% tariff on US products, the US may retaliate with a 20% tariff on Indian imports.
But Trump’s “discounted reciprocal tariff” against India (26%) indicates an altered strategy—pursuing trade balance while keeping diplomatic channels open.
How US Enforces Tariffs?
US Customs and Border Protection (CBP) administers tariffs at more than 300 ports of entry, such as border crossings, seaports, and airports. The process includes:
Tariff Classification: Products are assigned codes under the Harmonized Tariff Schedule (HTS), identifying duties that apply.
Customs Clearance: Tariffs are paid upon importation, with revenue going to the US Treasury.
Penalties for Misclassification: Erroneous declarations, whether fraudulent or unintentional, may result in fines or prosecution.
Some products are eligible for tariff-free entries:
Re-Imported American Products: A product produced in America and then re-exported in the original form without any changes can re-import duty-free.
Produced Goods with Foreign Ingredients: A product produced using American inputs but assembled elsewhere can attract tariffs on its full value on re-import.
Alternatives To Tariffs
Goverments can substitute tariffs with:
Subsidies: Financial assistance directly to domestic businesses, making them competitive without charging imports a tax.
Trade Agreements: Bilateral or multilateral arrangements that reduce trade barriers (e.g., the USMCA, which substituted for NAFTA).
Export Incentives: Tax incentives for firms selling products overseas, promoting international competitiveness.
Long-Term Effects of Tariff Wars
The current US-China-EU tariff war may have serious implications:
Supply Chain Shifts: Firms shift production to tariff-free areas, reconfiguring global trade patterns.
Economic Slowdown: Trade wars lower GDP growth and deter investment.
Currency Fluctuations: Nations adjust exchange rates to offset tariff impacts, impacting global financial markets.
What’s Next?
As Trump escalates his protectionist trade practices, world markets are unsettled. Critical questions abound: Will China, India, or the EU retaliate? How will companies respond—shifting costs, passing them on in higher prices, or shifting production? Can diplomacy diffuse tensions, or will it spiral into a trade war? Although the ultimate effect of tariffs is uncertain, their economic ramifications are vast.