What Is a Tariff? – NerdWallet

A tariff is a tax levied on imported goods when they enter the country. It could be calculated as a fixed amount or a percentage of the price of the goods it’s applied to. The government might impose a tariff to raise revenue or protect domestic interests. Whatever the purpose of the tariff, economists say much of its cost is passed through to domestic producers and consumers in the form of higher prices.

Generally, decisions about taxes fall to Congress. But, through a string of laws dating back to 1934, legislators have given the president and his cabinet considerable authority over tariffs.

When President Donald Trump levied tariffs on steel and aluminum imports in 2018, he cited part of the Trade Expansion Act of 1962, which allows the president to set tariffs on imports that the secretary of commerce says pose a threat to national security.

President Joe Biden did something similar in May, citing a section of the Trade Act of 1974 to empower the Office of the United State Trade Representative to increase tariffs on China.

Legislators have introduced multiple bills during the past two presidential terms aimed at limiting the president’s unilateral tariff-setting power. In a recent example, Sen. Rand Paul (R-KY) has proposed the No Taxation Without Representation Act, which would require Congressional approval for any tariffs.

A nation like the United States might impose tariffs to increase revenues for the federal government, motivate trade partners to change behavior or protect domestic industries that are losing to foreign competitors.

For a long time, import tariffs were the U.S. government’s main source of income, according to the Cato Institute, a libertarian think tank. But that started to change when the first income tax was put in place during the Civil War in 1862.

In fact, tariffs haven’t been a major part of the U.S. budget since 1914, according to economic researchers at the Peterson Institute for International Economics, a nonpartisan think tank.

For tariffs to be a reliable income source, they have to be low and targeted enough to continue encouraging trade, the Cato Institute says. If they’re too high or broad, the market will shift to favor goods from sources that aren’t taxed in the same way — or discourage imports altogether.

That can put this goal of generating revenue at odds with the other goals of import tariffs.

Especially recently, it’s common for U.S. tariffs to serve as a foreign relations tool to influence trade partners’ behavior. By taxing certain goods — perhaps those coming from a particular country or region — the U.S. is trying to shift the market away from those sources.

At the same time that tariffs could penalize a trade partner, they can buoy domestic industry by creating demand for goods from an alternative source. The goal is to protect domestic producers from cheaper goods being made by foreign competitors. In turn, that’s meant to create jobs and promote innovation at U.S.-based companies.

Encouraging domestic production of certain goods also is believed to serve a national security interest.

Tariffs are in place on a variety of imported goods.

In 2018, Trump levied tariffs of 10% to 50% on a huge range of goods, mostly from China, including solar panels, washing machines, as well as steel and aluminum.

In his current bid for president, Trump says he would impose a 10% tariff on all imports, which would be added to any existing tariffs.

Biden has expanded some of Trump’s tariffs. In May, he increased tariffs on steel and aluminum, semiconductors, electric vehicles, batteries, medical equipment and solar cells, among other goods coming from China. After the increases, tariff rates on these items range from 25% to 100%.