What is a Tariff?

Tariffs have once again taken centre stage in global economics this year, reshaping trade flows and unsettling markets. Under Trump’s trade policy, steep tariffs are a key tool in redefining America’s trade relationships – with ripple effects being felt worldwide. In this post I’ll cover what a tariff is, how they work, and why they have been dominating the headlines in recent months.

Essentially, a tariff is a tax placed by one country on the goods imported from another country. This is often paid by the importer buying the foreign good. Tariffs can be applied in the form of a percentage of a products value or as a fixed fee per unit imported.

Why do Governments Use Tariffs?

Governments use tariffs as a way of raising revenue through added income from imports. The associated cost that a tariff applies to a good is reflected through an increase in price for consumers in the country applying the tariff. This can negatively effect consumers, but potentially protect domestic markets as incentives are created to buy from locally produced products as consumers may opt for a cheaper product.

How are exporting countries affected?

This negatively effects the exporting country’s economy as the demand for a product may decline in the importing market. This can create barriers to entry in markets effected by the tariffs as there are limits to export opportunities. As it is more difficult for exporting companies to sell their products, lower profits will be reflected through lower stock prices, negatively effecting investors.

For this reason, governments are able to use tariffs as a form of economic leverage. This has been on full display in 2025 with Trump’s tariff regime reigniting trade tensions – most notably with China. These trade tensions have previously created trade wars between countries; retaliation is common in response to tariffs imposed on their exports. However, this leverage can force negotiations between countries to eventually create a more positive trade environment in the long term.

How are Importers Affected?

The need to allocate funds up-front for importing goods can strain cash flow for importers dealing with products that are affected by tariffs. As well as this, profit margins can also be affected by the need to adjust business operations after a tariff has been applied, often causing disruption as the business attempts to source cheaper goods from countries not affected by tariffs. The higher costs and decreased profits faced by importing institutions may be reflected by a drop in their stock prices, meaning investments in their company less valuable.

While tariffs are often introduced for domestic industries, their broader effects can be widespread – disrupting trade, tightening profit margins, and unsettling investors. Whether Trump’s tariff war ultimately reshapes global trade for better or worse remains to be seen.

References

Nevil, S. (2025). What Is a Tariff and Why Are They Important?. Accessed at: https://www.investopedia.com/terms/t/tariff.asp

Conde, and Stanek. (2025). Who’s Actually Responsible for Paying a Tariff?. Accessed at: https://smartasset.com/taxes/who-pays-tariffs