What exactly are tariffs and how do they work?

Tariffs have taken center stage in recent months, with President-elect Donald Trump campaigning on plans to levy steep tariffs on imported goods to bolster the U.S. economy. Now that he has won the presidency, those proposed tariffs could soon become a reality.

When President Donald Trump returns to the White House come January, he "plans to sign an executive order enacting 25% tariffs on all imports from Canada and Mexico," alongside a "10% tariff above any additional tariffs on China," said NerdWallet. As a result, "any or all of the nations could retaliate by levying their own tariffs on the U.S.," which may have some major economic implications.

While we wait to see what Trump ends up doing — and what Congress allows — let's return to the basics and review what tariffs actually are and how they work.

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What is a tariff?

A tariff is a "type of tax levied by a country on an imported good at the border," said Investopedia. Technically, there are two types of tariffs: a specific tariff, "levied as a fixed fee based on the type of item," and an ad valorem tariff, which is "levied based on the item's value."

Tariffs can serve a number of purposes. They may be used "to raise revenue, protect domestic industries, or exert political leverage over another country," said Investopedia. "By making foreign-produced goods more expensive, tariffs can make domestically-produced alternatives seem more attractive."

While decisions about taxes usually fall to Congress, "through a string of laws dating back to 1934, legislators have given the president and his cabinet considerable authority over tariffs," said NerdWallet.

What effects can tariffs have?

Because tariffs "slapped on foreign imports make them more expensive," they "ostensibly" end up "providing a price advantage to locally made goods," said The Guardian. So, in theory, the advantages of tariffs can include "stronger domestic industries," not to mention "increased government revenue," said Business Insider.

Further, tariffs may serve as a way to put "pressure on other countries to stop unfair trading practices and help address issues such as illegal immigration and the drug trade," Business Insider added. As an example, the tariffs levied in Trump's first term "were ostensibly to punish China for what the U.S. said were longstanding intellectual property theft and unfair trade practices," said The Guardian.

Tariffs can have negative impacts too, however, and may result in "unwanted side effects, such as higher consumer prices," said NerdWallet. "The artificial increase in the price of imports can also theoretically lead to weaker domestic competition, and local industries that are less efficient and innovative," The Guardian added.

Then there is the possibility of retaliation. Sometimes, an attempt to "pressure a rival country by using tariffs can devolve into an unproductive cycle of retaliation," also known as a trade war, said Investopedia.

How can tariffs impact consumers?

While this may seem like a topic that "only matters to economic policy wonks" and not the average American, said Yahoo Finance, "tariffs affect you more than you think, even if you're not directly cutting the check."

For starters, while tariffs imposed by the U.S. government are "paid by the domestic companies that import the relevant goods or materials," consumers will eventually end up footing the bill, since "those companies tend to raise prices to cover higher import costs," said NerdWallet. Tariffs therefore often "have a regressive impact, disproportionately affecting lower-income consumers." Higher prices can mean that "individuals with limited financial means, who typically spend a higher percentage of their income on basic necessities, may bear a heavier burden," said Investopedia.

As for domestic employment opportunities, the effect of tariffs on jobs is "hotly debated," said Yahoo Finance. The Trump-introduced tariffs on steel and aluminum when he was last in office did lead a "few shuttered steel plants to reopen and were credited with creating several thousand jobs in the metals industry," for example. On the flip side, "when tariffs are imposed on materials like steel and aluminum, industries that use those materials — like the manufacturing sector — face higher costs, which can negatively impact employment," the outlet added.