What Is a Tariff?
A tariff is a tax that a government charges on goods imported from another country. It is also called a duty or customs duty. When a container of shoes arrives at a US port, the company importing them must pay any tariff owed before the goods are released.
Tariffs are usually set as a percentage of the goods’ value, called an ad valorem tariff. A 10% tariff on $10,000 of imported shoes means $1,000 of duty. Some tariffs are a fixed amount per unit instead, such as a set charge per kilogram.
Governments use tariffs for several reasons: to raise money, to protect domestic industries from foreign competition, to respond to what they see as unfair trade practices, or as leverage in negotiations with other countries.
Who Actually Pays a Tariff?
Legally, the importer pays: the business in the importing country that brings the goods in. In the US, that is the “importer of record”, which pays the duty to U.S. Customs and Border Protection (CBP).4 The foreign company that made the goods does not send a payment to the US government.
Who ends up bearing the cost is a different question, and it is the one that matters for prices. Once the importer has paid, there are three places the cost can go:
- The importer absorbs it, accepting lower profit margins.
- Customers pay it, through higher prices passed down the supply chain.
- The foreign supplier pays it, by cutting its price to keep the business.
The share that reaches customers is called pass-through. A widely cited study of the 2018 US tariffs by economists Mary Amiti, Stephen Redding and David Weinstein found complete pass-through into the prices of imported goods. Its conclusion: the full cost of those tariffs had fallen on domestic consumers and importers.3
Pass-through isn’t always complete or immediate. It depends on how easily buyers can switch to other products, how much competition there is, and how long the tariff is expected to last. But the idea that a tariff is simply “paid by the other country” is not what the evidence shows.
How a Tariff Reaches the Price You Pay
A tariff can grow as it moves down the supply chain. That is because many businesses price their goods as a markup on what they cost to buy, and the tariff becomes part of that cost.
Here is an illustrative example. A retailer imports a lamp for $100 and normally adds a 50% markup, selling it for $150. A 10% tariff adds $10 to its cost:
| No tariff | 10% tariff, fully passed on | |
|---|---|---|
| Import price | $100 | $100 |
| Tariff paid by importer | $0 | $10 |
| Landed cost | $100 | $110 |
| Price with 50% markup | $150 | $165 |
| Extra cost to the customer | — | $15 |
If the retailer keeps its usual percentage markup, the customer pays $15 more, even though the tariff itself was $10. In competitive markets, many businesses keep the extra margin smaller, but the example shows why tariffs can raise shop prices by more than the duty collected. This is one way tariffs can feed into inflation.
Where US Tariffs Stand in 2026
US tariffs are much higher than before 2025, but the rules have changed several times. The most useful single number is the average effective tariff rate: total customs duties collected divided by the value of imports.
| Measure | Figure |
|---|---|
| Average effective tariff rate, January 2025 | 2.3% |
| Average effective tariff rate, August 2026 | 7.1% |
| Steel and aluminum effective rate (highest category) | 39.8% |
| China, effective rate (highest major partner) | 24.3% |
| Canada and Mexico imports claiming USMCA exemption | 81.4% |
These figures come from the Penn Wharton Budget Model’s October 2026 update.1 They measure duties actually collected, which is lower than the headline rates because many goods are exempt or come in under trade agreements.
The biggest change came on 20 February 2026, when the Supreme Court ruled in Learning Resources, Inc. v. Trump that the International Emergency Economic Powers Act (IEEPA) does not authorize sweeping tariffs. The vote was 6–3.2 Tariffs imposed under that law ended, and importers became eligible for refunds; Penn Wharton reports that about $166 billion had been collected under IEEPA and that around $126 billion of refunds had been certified by early October 2026.1
Other tariff laws were not affected. Section 232 national-security tariffs, including a 50% tariff on steel and aluminum, remain, and Section 301 trade-practice tariffs continue to apply to many goods, including from China.12 Yale’s Budget Lab tracks the changing statutory rates in detail for anyone who needs the full picture.5
See How Costs Hit the Bottom Line
Tariffs raise costs before they raise prices. See why cash flow, not profit, decides whether a business can absorb them.
Read: What Is Cash Flow? →Why Governments Use Tariffs
Tariffs have supporters and critics, and both sides have real arguments.
| Arguments for | Arguments against |
|---|---|
| Protect domestic industries and jobs from foreign competition | Raise prices for consumers and businesses that use imported parts |
| Respond to unfair practices such as subsidies or dumping | Invite retaliation that hurts exporters, such as farmers |
| Raise government revenue | Revenue comes largely from domestic buyers, acting like a sales tax |
| Give leverage in trade negotiations | Create uncertainty that delays business investment |
| Reduce reliance on rivals for critical goods | Protected industries may face less pressure to improve |
Economists broadly agree that tariffs raise costs for the importing country’s buyers. Where they disagree is on whether specific goals, such as protecting a strategic industry, are worth that cost. That is a political judgement as much as an economic one.
A Short History of US Tariffs
High tariffs are not new, and history is one reason most economists are wary of them. In 1930 Congress passed the Tariff Act, better known as the Smoot-Hawley tariff, which began as a farm-relief bill and grew into higher tariffs across the economy.6 The US State Department’s Office of the Historian says it contributed to a drastic contraction of international trade during the Great Depression: world trade fell by some 66% between 1929 and 1934, although scholars still debate how much of that fall the tariff caused.6
From the 1934 Reciprocal Trade Agreements Act onwards, US policy generally moved towards lower tariffs through bilateral and multilateral agreements.6 After the Second World War, the General Agreement on Tariffs and Trade and later the World Trade Organization pushed tariffs down further. By January 2025, the average tariff actually collected on US imports was just 2.3%.1 The rises since then mark the biggest shift in US trade policy in decades.
Tariffs vs. Other Trade Barriers
A tariff is only one way governments restrict trade. Others include:
- Quotas, which cap how much of a product can be imported.
- Sanctions and embargoes, which ban trade with certain countries, companies or people.
- Export controls, which limit what domestic firms may sell abroad, often for security reasons, such as advanced computer chips.
- Standards and paperwork, such as safety rules or labelling requirements, which can act as barriers even when they serve a real purpose.
Tariffs are the most visible of these because they show up directly as a cost on each shipment, and they raise money for the government, which quotas and bans do not.
How to Check the Tariff on a Product
In the US, tariff rates are listed in the Harmonized Tariff Schedule (HTS), published by the US International Trade Commission.7 Every product has a classification code, and the code decides the rate. A small difference, such as the material a product is made of, can put it in a different category with a different rate.
- Find the product’s HTS code by searching the schedule or asking your supplier.
- Check the base rate in the schedule, then any extra tariffs that apply to the country of origin, such as Section 232 or 301 duties.
- Check for exemptions, such as goods qualifying under a free-trade agreement like USMCA.
- Confirm with a professional. A licensed customs broker can confirm the classification, because penalties for getting it wrong can be costly.
How Businesses Respond to Tariffs
For a business, a tariff is a sudden rise in the cost of goods, and the response is a strategic choice. Common options include:
- Raising prices, fully or partly, if customers will accept it and competitors face the same cost.
- Absorbing the cost for a while to protect market share, at the expense of margin.
- Renegotiating with suppliers to share the cost.
- Changing suppliers or countries, often called diversifying or “friend-shoring” the supply chain.
- Stocking up before a tariff starts, which ties up cash and warehouse space.
- Redesigning products to use different parts or materials that face lower tariffs.
Each option has a cost. Switching suppliers takes time and can lower quality; stockpiling drains cash; raising prices risks losing customers. Small firms are often hit hardest, because they have less bargaining power and less spare cash flow to ride out a shock. A clear view of your business model, where your margins come from and how customers react to price, makes these choices easier.
What Happens When a Tariff Is Removed?
Prices don’t always fall as quickly as they rose. When a tariff ends, importers pay less at the border, but shops may keep prices where they are while they sell older, higher-cost stock, or to rebuild margins they cut while absorbing the tariff. Competition decides how fast savings reach customers.
Refunds work the same way. When the IEEPA tariffs were struck down, refunds went to the importers who had paid them, not to the shoppers who may have paid higher prices.1 And because tariff policy has changed so often, many businesses wait before cutting prices or moving suppliers back, in case new tariffs arrive. That uncertainty is itself a cost: it delays investment and makes planning harder.
What Tariffs Mean for Your Household
For most households, tariffs show up as slightly higher prices on a wide range of goods. Imported products are affected most directly, but domestic producers facing less foreign competition may also raise their prices.
The effect is uneven. Goods with a lot of imported content, such as electronics, clothing, toys and car parts, tend to see larger increases than services like haircuts or streaming subscriptions. Because lower-income households spend a bigger share of their budget on goods, tariffs can take a larger bite from their spending power. If prices are rising faster than your pay, it helps to know how inflation works and how it erodes savings.
Whether a business can absorb a tariff depends largely on its margins. Our guide to profit margins shows how thin margins in some industries leave little room.
Key Terms Explained
These are the terms you will see most often in news about tariffs.
| Term | What it means |
|---|---|
| Tariff (duty) | A tax on imported goods. |
| Importer of record | The business legally responsible for paying duties on an import. |
| Pass-through | The share of a tariff that ends up in the prices buyers pay. |
| Effective tariff rate | Total duties collected divided by the value of all imports. |
| Section 232 / Section 301 | US laws allowing tariffs for national security and for unfair trade practices. |
| Retaliation | Tariffs another country imposes in response. |
The Bottom Line
A tariff is a tax on imports that the importing business pays at the border. The evidence from recent US tariffs shows that most of the cost is passed on to domestic buyers rather than paid by foreign exporters. In 2026, US tariffs remain far higher than before 2025 even after the Supreme Court limited emergency tariffs, so businesses and households are still adjusting. For more on how costs and prices move through the economy, read about inflation and why interest rates are rising, or browse more business explainers.
Frequently Asked Questions
Not directly. The US importer pays the tariff to U.S. Customs and Border Protection. Foreign suppliers sometimes cut their prices to share the cost, but research on the 2018 tariffs found the cost fell almost entirely on US buyers.
They raise the prices of affected goods, which adds to measured inflation. Whether that becomes lasting inflation depends on how widespread the tariffs are and how the rest of the economy responds.
There isn’t one rate: it varies by product and country. Penn Wharton estimates the average effective rate actually collected was 7.1% in August 2026, up from 2.3% in January 2025.
On 20 February 2026 it ruled 6–3 that the International Emergency Economic Powers Act does not authorize sweeping tariffs. Tariffs under other laws, such as Sections 232 and 301, were not affected.
For tariffs collected under IEEPA, yes. Penn Wharton reports that around $126 billion of refunds had been certified by early October 2026. Businesses should check refund eligibility with CBP or a customs broker.
Options include checking whether goods qualify for trade-agreement exemptions, comparing suppliers in other countries, and renegotiating prices. A licensed customs broker can confirm the correct classification and rate.
Sources
- 1Penn Wharton Budget Model: Effective Tariff Rates and Revenues (Updated October 14, 2026)
- 2Brookings Institution: Experts on the Supreme Court’s Tariff Decision (February 2026)
- 3Amiti, Redding and Weinstein: The Impact of the 2018 Tariffs on Prices and Welfare, Journal of Economic Perspectives (2019)
- 4U.S. Customs and Border Protection: Basic Import and Export
- 5Yale Budget Lab: The State of U.S. Tariffs
- 6US Department of State, Office of the Historian: Protectionism in the Interwar Period
- 7US International Trade Commission: Harmonized Tariff Schedule
Every figure in this article is checked against the sources above. How we research and fact-check →
See How Costs Hit the Bottom Line
Tariffs raise costs before they raise prices. See why cash flow, not profit, decides whether a business can absorb them.
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