Tariffs have become a central talking point in international trade discussions, especially with former President Donald Trump’s push for levies on major US trading partners such as China, Mexico, and Canada. While these import taxes generate headlines, they also carry real economic consequences for businesses and consumers alike. Below, we break down how tariffs work, who ultimately foots the bill, and what happens to the revenue.
What Are Tariffs and Why Are They Imposed?
Tariffs are taxes on imported goods designed to serve several purposes:
- Revenue Generation: Historically, tariffs were a key source of government income.
- Protecting Domestic Industries: By making foreign products more expensive, tariffs encourage consumers to buy locally produced goods.
- Foreign Policy Lever: Tariffs can also be used to influence other nations’ policies. For instance, the threat of punitive tariffs on Mexico and Canada was tied to agreements about border security and anti-drug measures.
In the case of China, the United States initially imposed a 10% tariff on certain imports, with plans to introduce additional tariffs on a broader range of products. The strategy signaled a willingness to use tariffs both for economic goals and as a foreign policy tool.
How Tariffs Are Collected and Enforced
Although the US Treasury secretary sets regulations on tariffs, US Customs and Border Protection (CBP) enforces them at nearly 330 ports of entry, including major seaports, airports, and land border crossings. CBP agents review paperwork, collect duties, and can assess penalties if importers misdeclare goods—intentionally or otherwise.
When products enter the US, the importer pays the tariff immediately, and the funds go to the Treasury Department’s General Fund. Goods that cross borders multiple times may also be subject to tariffs more than once, depending on whether they have been “improved” or “advanced” in value while abroad.
Tariffs’ Financial Impact
Although tariffs once provided a large share of US government revenue, they currently make up a small percentage—less than 3% in recent years, according to the Federal Reserve Bank of St. Louis[^2]. If tariffs on China, Mexico, and Canada were made permanent at the rates initially suggested, the Tax Foundation[^3] estimates the additional costs for US importers could reach $1.1 trillion over a decade.
Recent calculations suggest that tariffs imposed on China during the Trump administration and maintained under Joe Biden’s presidency yield about $77 billion annually. In 2025 alone, such tariffs could raise levies by nearly $110 billion, illustrating their significant, if still relatively modest, role in overall government revenue.
Who Really Bears the Cost?
While tariffs are designed to tax foreign-made products, research generally shows that US consumers and businesses shoulder much of the financial burden. Importers faced with higher fees may pass the cost on by raising prices, effectively taxing consumers. Foreign producers might lower their prices to stay competitive, but more often, the end user sees a price hike on the shelf.
However, certain exemptions exist. US-based companies can apply for relief if tariffs put them at a disadvantage and they cannot source goods from an alternative country. Yet these exceptions are often temporary or subject to strict criteria.
Consequences of Tariff Impositions
When tariffs take effect, importers commonly resort to strategies like:
- Shipping through a third country to conceal the product’s original source.
- Underreporting the product’s value to lower the calculated tariff.
- Mislabeling goods as similar but lower-duty items.
Tariff disputes can also alter trade flows. After the US imposed tariffs on Chinese steel, aluminum, and other products, China’s share of US imports dropped from about 20% to around 14% by 2023. A Goldman Sachs study (cited in Bloomberg[^5]) found that tariff evasion alone could explain tens of billions of dollars in reduced import activity from China.
The Proposed “External Revenue Service”
The Trump administration floated the idea of creating an “External Revenue Service” to collect tariffs as part of its “America First” trade stance. While branding them as “external” might suggest these taxes come from abroad, in practice, US-based importers typically pay the tariffs, often passing costs on to American consumers.
Impact on Trade Agreements
The US is bound by various free-trade agreements (FTAs) and is also a member of the World Trade Organization (WTO)[^4]. FTAs with 20 nations—including Mexico and Canada under the USMCA (formerly NAFTA)—require tariffs to be kept near zero. Proposing new levies against these trading partners can clash with existing agreements.
When China was hit with tariffs, the Ministry of Commerce in Beijing filed a complaint at the WTO, describing the levies as a “serious violation” of international rules. Such disputes highlight the delicate balance between protecting domestic industries and maintaining globally recognized trade obligations.
Sources
- US Customs and Border Protection (CBP) – https://www.cbp.gov
- Federal Reserve Bank of St. Louis – https://fred.stlouisfed.org
- Tax Foundation – https://taxfoundation.org
- World Trade Organization (WTO) – https://www.wto.org
- Bloomberg – https://www.bloomberg.com
Tariffs may serve as powerful tools for governments to protect industries, raise revenue, and steer international negotiations. However, the economic fallout—ranging from increased consumer prices to strained global relations—underscores how complex and consequential these import taxes can be.
