Understanding Tariffs: A Comprehensive Guide to How They Function

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This week, US President Donald Trump announced controversial tariffs on goods from three of the US’ biggest trading partners.

In three executive orders, Trump announced 25 per cent tariffs on Mexican and most Canadian imports and an . Tariffs on Canada and Mexico were later paused.

Trump has long promised he would implement tariffs and during his presidential campaign, he said repeatedly that “tariff” is the “most beautiful word in the dictionary”.

What are tariffs?

A tariff (or import duty) is a tax imposed on foreign goods imported into a country.

Tariffs aren’t paid by the foreign countries they target. Instead, they’re charged to the buyer of those goods and the money goes to — in this case — the US treasury.

Most economists agree that it’s the residents of the country imposing the tariffs who pay the biggest cost, as importers will typically pass the extra cost onto the consumer by raising prices.

How do they work in practice?

When a foreign manufacturer imports their goods to be sold in the US — say from Canada or Mexico — a 25 per cent tariff would be placed on each product.

That 25 per cent tariff must then be paid to the government, increasing the price of a $100 product to $125. In contrast, a locally produced product would be levy-free and possibly cheaper.

To manage the increased cost, the company selling that product could do one of three things:

Absorb the price and accept lower profits
Absorb part of the tariff cost and hand the rest onto the consumer by increasing the price
Raise the cost of the product to cover the tariff cost.

A diagram showing how US tariffs could work with a 10 per cent tariff on a bottle of wine

Source: SBS News

Who uses tariffs?

There is a long history of international trade wars fought using tariffs, with many former US presidents using tariffs to force other countries to align with American interests.

Trump has imposed tariffs against China before. During his first presidential term, he initiated a two-year trade war with China with tit-for-tat tariffs that upended global supply chains and damaged the global economy.

Australia has been subject to tariffs from China due to a political dispute, with tariffs placed on Australian wine and barley in 2020. These were removed in March as the relationship between the two countries improved.

I usually describe tariffs like this as akin to a circular firing squad because essentially you are targeting someone else but hitting yourself in the process.

Markus Wagner, University of Wollongong

How will the US be impacted by tariffs?

Nearly half of all US imports come from Mexico, Canada and china and experts say it’s likely that US consumers will bear the brunt of the imposed tariffs and pay more for a wide range of goods, including fuel, beef, eggs, fruit and vegetables, cars, beer, whisky, tequila, maple syrup.

Trump himself said tariffs may cause “short term pain” for US consumers.

Speaking to SBS News, economic law professor at the University of Wollongong, Markus Wagner said he describes tariffs as “akin to a circular firing squad because essentially you are targeting someone else but hitting yourself in the process.”