Since the 17th century, tariffs have been used by U.S. government officials as a means to influence or settle political and economic affairs on national and international levels. Since returning to office, President Donald Trump has promised to impose tariffs on foreign imports to the U.S. with levies on Canada and Mexico already in effect. Here’s a look at tariffs and the role they play in the U.S.

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THE POWER OF TARIFFS

Revenue: Governments collect tariffs as they would income or sales tax. The money collected is put in the treasury and rolled into the overall budget. However, in the U.S., tariffs accounted for less than 2% of the federal government’s revenue in 2024. Poorer countries often have far higher tariff rates than wealthier countries because their governments depend on them for revenue.

Protect: The government may put high tariffs on certain imported goods if they feel the flow of goods is hurting domestic or regional producers. In this case, the goal of raising tariffs on imports would be to make those goods more expensive and give a price advantage to domestic goods, protecting businesses that produce them.

Influence: Governments can limit or ban the import or export of goods and services from another country to influence behavior in non-economic matters such as human rights, treaty violations or war. Tariffs can also be used to discourage certain trade practices like “dumping,” which is when companies export products to another country and sell them at artificially low prices to gain a competitive advantage.

Retaliate: Sometimes, when one country imposes a tariff on another country’s goods, the exporting country responds with retaliatory tariffs of its own.

National security: A government may implement tariffs to avoid relying too heavily on different countries for goods deemed critical to security, like military supplies.

TARIFFS AND INFLATION

Most economists agree that Trump’s proposal of a sweeping 60% tariff on all goods imported from China, Mexico and Canada would result in higher costs for U.S. consumers, since tariffs are essentially taxes on imports, and the importing businesses typically pass those costs on to the end consumer. According to U.S. Global Investors, the size of the impact would depend on the specifics. A hypothetical 10% tariff on all goods entering the U.S. would increase overall prices by an estimated 1.3% annually. Selective tariffs targeting specific goods or countries could be even more disruptive.

TARIFFS OR TAXES?

During his presidential campaign, Trump floated the idea of an “all tariff policy” which he said would allow the U.S. to eliminate income taxes. Until 1862, when President Abraham Lincoln signed into law a permanent internal tax system, tariffs were a major source of federal revenue. But federal spending levels in the U.S. have increased about 10 times their share of the economy since then. In the fiscal year 2024, excise taxes consisted of 2% of the federal government revenues, while individual income taxes accounted for 50% of revenues. Policy experts believe the idea of replacing income taxes with tariffs is an unrealistic proposal.

Sources: U.S. Department of the Treasury, Britannica, The American Presidency Project, BBC, Yahoo Finance, Bureau of Labor Statistics, Bloomberg, U.S. Global Investors