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What is a tariff? China's latest moves, explained

Stocks slide amid trade war
Stocks slide amid trade war 02:35
  • A tariff is a tax on a particular good from a particular country.
  • China isn't paying tariffs to the U.S. Treasury — businesses and consumers in the U.S. are the ones paying.
  • Tariffs are meant to encourage domestic industries, but most economists say they slow overall economic growth.

The U.S. and China are escalating their trade war, with each side imposing tariffs on imports from the other. President Donald Trump last week announced that tariffs on $200 billion worth of Chinese imports would increase, to which China responded Monday by putting levies on $60 billion of U.S. goods.

Here's what that means for U.S. consumers.

What is a tariff?

A tariff is a tax or fee paid on an import. Tariffs are sometimes called duties or levies. Typically, a tariff is charged as a percentage of the transaction price that a buyer of the goods pays a foreign seller.

Here's an example made simple (ignoring real-world minimum amounts subject to tariffs). Say the U.S. imposed tariffs of 6.5% on garden umbrellas from China. If an American retailer wanted to buy 100 garden umbrellas from China for $5 apiece (a pre-tariff total of $500), the 6.5% tariff would come out to $32.50 tariff for the shipment. That raises the total price of the shipment from $500 to $532.50.

How Trump's trade war affects you 01:33

In the United States, tariffs are collected by Customs and Border Protection agents at 328 ports of entry across the country. Proceeds go to the Treasury. The tariff rates are published by the U.S. International Trade Commission in the Harmonized Tariff Schedule, which lists U.S. tariffs on everything from dried plantains (1.4%) to parachutes (3%).

Sometimes, the U.S. will impose additional tariffs on imports that it determines are being sold at unfairly low prices or are being supported by foreign government subsidies.

Who pays tariffs?

While tariffs are imposed on goods coming from a particular country, it's not that country that pays the fee. Rather, it's the importer bringing in the goods. When the importer is a company, it typically passes on some or all of the cost of a tariff to the consumer.

Some theories hold that the higher prices for imports will encourage consumers to instead buy goods made in the U.S. or elsewhere. But the risk is that consumers could simply respond by spending less than they otherwise would, which would hurt growth.

Cotton on China tariffs: "Some sacrifice" for... 06:53

The burden of Mr. Trump's tariffs on imports from China and other countries falls entirely on U.S. consumers and businesses that buy imports, said a study in March by economists from the Federal Reserve Bank of New York, Columbia University and Princeton University. By the end of last year, the study found, the public and U.S. companies were paying $3 billion a month in higher taxes and absorbing $1.4 billion a month in lost efficiency.

What is the purpose of tariffs?

Tariffs are supposed to achieve two things: Raise money for the government and protect domestic industries from foreign competition. They can also punish foreign countries for practices like subsidizing their exporters and dumping their goods at unfairly low prices. That was the rationale behind the Trump administration's imposition of steel and aluminum imports from China last year.

Tariffs boost domestic industries by making imports costlier, thereby discouraging them. They also reduce pressure from foreign competition and make it easier for home-grown companies to raise prices.

President Donald Trump on Monday tweeted that tariffs could be  "completely avoided if you by from a non-Tariffed Country, or you buy the product inside the USA (the best idea)."

However, domestic producers often respond to tariffs by raising prices for their own products.

How Trump's tariffs on China will impact you 03:36
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