What are tariffs, who pays for them? What to know about Trump's plan, Canada's response

Yahoo

05-03-2025

The economy is a complicated topic, and discussing tariffs can get confusing.
Just after midnight on Tuesday, President Donald Trump sparked a trade war with three of the country's biggest trading partners – including Canada – that could have long-lasting effects on Americans, according to economists.
After years of a free-trade agreement, Trump imposed 25% tariffs on imports from Canada and Mexico while doubling the duties on some Chinese goods to 20% as part of his "America First" agenda.
'It's a very powerful weapon that politicians haven't used because they were either dishonest, stupid or paid off in some other form,' Trump said in the White House's Roosevelt Room on Monday.
More: Here's how Texas could be affected by Trump's tariffs on Mexico, Canada
The action immediately shook global markets, plummeted stocks and will likely raise prices on everyday products – from gas to produce – for consumers. Canada, Mexico and China quickly retaliated, with Canadian Prime Minister Justin Trudeau saying Ottawa is setting 25% tariffs on $20.7 billion worth of U.S. imports, from orange juice to cosmetics.
If Trump's duties remain in place in 21 days, Canada will add tariffs on the remaining $86.2 billion worth of U.S. imports, including vehicles, produce and meat.
Here's what you need to understand about tariffs.
A tariff is a tax that a government imposes on goods imported from other countries. It is a type of trade regulation used to protect or generate revenue.
Tariffs are not like income or sales taxes. Instead, they are levies — additional fees — placed on products imported to the country.
Monica Morlacco, assistant professor of economics at the USC Dornsife College of Letters, Arts and Sciences, explain its functions.
"Tariffs are typically imposed for protection or revenue purposes," she said. "A protective tariff increases the price of imported goods relative to domestic goods, encouraging consumers to buy from local producers, who are thus 'protected' from foreign competition. A revenue tariff, on the other hand, is mainly used to generate money for the government."
Some think the foreign companies that make the goods pay the tariffs, but the cost of a tariff is typically paid by the importer of the goods. When a tariff is imposed, it increases the cost of importing a product into a country.
The importer may absorb the higher cost or pass it on to consumers through higher prices. This means that while the importer pays the initial bill for the tariff, the financial burden often shifts to businesses and consumers in the form of increased prices.
For example, if the U.S. government wants to protect American car manufacturers from foreign competition, it may impose a 10 percent tariff on imported cars from other countries. If a car that's manufactured in Japan costs $20,000, an importer must pay an extra $2,000 in tax. The total cost of the imported car would increase to $22,000, which may be passed down to the consumer.
According to the Tax Policy Center, higher prices of goods in the U.S. will lead to fewer consumers buying goods.
In the short run, higher prices for imported goods will reduce consumption of those goods," they explained. "But in the longer term, the decline in competition from foreign products makes domestic firms less efficient. And less competition will result in higher prices, not just for those goods subject to the tariff but for competing goods that are not—such as those made domestically. In the case of Trump's tariffs on China, that means US consumers will pay somewhat higher prices."
So even though it doesn't feel like a direct tax because it's not added on to an individual purchase, buyers are the ones covering the extra cost in the price of the item.
In a news conference Tuesday, Prime Minister of Canada Justin Trudeau said Trump's decision to levy tariffs on the U.S.'s largest trading partners is a foolish idea.
"We should be working together to ensure even greater prosperity for North Americans in a very uncertain and challenging world," he said. "Now, it's not in my habit to agree with the Wall Street Journal, but Donald, they point out that even though you're a very smart guy, this is a very dumb thing to do."
In the U.S., tariffs have been implemented since 1789, with the first significant tariff law enacted to help finance the newly established government.
Morlacco states that the U.S. has not relied heavily on tariffs for a long time.
"For example, in 1900, tariffs accounted for more than 41% of U.S. government income, but by 2013, that number had fallen to just 2%," she said. "However, many developing nations, like the Bahamas and Ethiopia, still rely on tariffs for a significant portion of their revenue."
In the U.S., Congress holds the authority to establish tariffs. However, certain laws permit the president to impose tariffs, especially in situations related to national security or economic emergencies.
-USA TODAY Network reporter Kathleen Wong contributed to this report.
This article originally appeared on Austin American-Statesman: What are tariffs and who pays them? What to know about Trump's plan