What are tariffs, and how do they work?

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In 1930, as the Great Depression ravaged the United States, President Herbert Hoover made a bold economic decision. With the goal of supporting American farmers and manufacturers, he approved a sweeping 20% tax on all imported agricultural and industrial goods.

He believed making foreign goods more expensive would encourage consumers to buy domestic, thus funneling cash into American businesses and creating more jobs. But Hoover's plan completely backfired. Other countries retaliated by taxing American goods, leading exports to fall and

global trade to decline. In the end, this policy led American prices to spike and caused even more unemployment. These disastrous outcomes of the Smoot-Hawley Tariff Act were no surprise to the over 1,000 economists who publicly condemned the bill.

But this wouldn’t be the last time a world leader was shocked by a tariff's consequences. So, what exactly is a tariff? A tariff is a tax an importer pays to bring foreign goods into a country. For example, if

they import $1,000 worth of goods at a 10% tariff rate, they'll pay $100 to the government in addition to $1,000 to the seller. Foreign exporters could respond to a tariff by reducing their product’s price to keep an importer’s

business. But if they don’t, importers bear this cost and then increase their prices so consumers will make up the difference. This may sound straightforward, but enacting a tariff kicks off a complicated economic chain reaction. So to keep things

simple, let's look at some examples from just one country to explore some of the factors that make a tariff’s outcomes tricky to predict. First, tariffs can be applied to different countries at different rates. For example, in 2024, America

had a 6% tariff on all wool entering the country. However, if that wool came from Mexico or South Korea, it would be tariff-free due to trade agreements. Meanwhile, importers getting wool from Russia could face a hefty 55.5% tariff.

Policies like these might help domestic wool producers, or they might just encourage importers to buy from specific foreign producers. Things get even trickier when trying to predict how tariffs impact jobs. Sometimes the jobs they create come at a

high cost. In 2018, the US imposed a tariff on washing machines that created 1,800 jobs and raised roughly $82 million in government revenue. However, it also increased the average price of washing machines by $86, costing consumers roughly $1.5

billion. This means consumers paid roughly $817,000 to create each of those jobs. In other cases, the jobs tariffs create come at the cost of existing jobs. In 2002, the Bush administration imposed tariffs as high as 30% on imported

steel. Employment in US steel production had been decaying for decades, so by making foreign steel more expensive, the tariff sought to create new jobs for US steel manufacturers. Initially, the policy did slow down job loss. But since US

steel still cost more than pre-tariff foreign steel, domestic industries that used this material had to increase their prices. This made their products less competitive internationally, where foreign manufacturers were still using cheap steel. Within a year of enacting the

tariff, the US lost far more jobs in steel-related industries than they gained in steel-producing industries. Clearly, how other countries respond to tariffs is another big part of the ripple effect these policies have. One clear example comes from 2018,

when the US attempted to address its trade deficit with China by taxing Chinese goods. While these tariffs protected domestic businesses and raised government revenue, they also set off a trade war. China retaliated by raising tariffs on US exporters,

including farmers relying on Chinese markets for soybean sales. In the end, this led to higher prices for US consumers and a slight drop in America's GDP. Trade wars aren’t new. And even in the 18th and early 19th centuries,

when certain tariffs did help struggling industries find their domestic footing, they were mostly used to raise government funds. But over the last 200 years, our global economy has become far more interdependent. Today, there are more manufacturing components being

imported than ever before, many of which are used to make a wide variety of consumer goods. This complexity means that even a seemingly simple tariff can trigger a global chain reaction, creating more consequences than anyone can plan for.