In 2025, the U.S. government announced a variety of tariffs on goods imported into the U.S. from other countries. The way tariffs work is that when goods are imported into the country, the company importing them pays a percentage of the cost of the goods to the government. So, a tariff is just another type of tax. An imported good that costs $1000 with a 30 percent tariff rate causes the importing company to pay $1000 to the foreign company for the product, plus $300 to the U.S. government. Will the new price of the good to the consumer be $1300? Or will the importer or producer eat some of the tariff, reducing their profit margin? That is a complicated question, as we will see. But let’s first look at the benefits of international trade and why it occurs.

Economists generally think international trade makes everyone better off because of a concept called comparative advantage. The idea is that your own country is relatively better at producing certain goods and services, and other countries are relatively better at producing other goods and services. These days, U.S. firms have a comparative advantage in tech, banking, and accounting. Other countries have a comparative advantage in producing goods—China and other countries for producing clothes and toys, Europe for producing wine and chocolate, Japan for producing steel and autos, and so on. So, it makes sense for each area of the world to produce the goods they are best at producing, and to trade with others. When tariffs are imposed by a country, the tariffs change the prices to consumers, distorting their decisions, and reducing the benefits brought by trade.

Will anyone benefit from tariffs? The main benefits of tariffs go to the domestic workers and firms in the industry that is subject to the tariff, plus the U.S. government, which gains tariff revenue. When foreign goods become more expensive, domestic firms’ sales can go up, or they can raise their prices, or both. Sometimes, tariffs imposed worldwide on a product can lead to new production within the country that imposed the tariff, which is what happened with washing machines in 2018 when firms started producing more washing machines in the U.S.

Who bears the cost of tariffs? In the first five months of 2025, U.S. tariffs brought in over $60 billion to the U.S. government, which is roughly 0.6% of GDP (about $10 trillion) over that same period. Economists have tried to see how tariffs affect prices and profits, and doing so is complex. First, the net price to consumers (or businesses, in the case of tariffs on goods used in production) may be higher, so they buy less of the good with the tariffs. They substitute to other goods, perhaps those without tariffs, and they just spend less because of the higher price as their purchasing power shrinks. Second, the reduced demand for the product affects the suppliers. They might decide to reduce prices because of the lower demand for their product, so their profit margins decline. Similarly for the importing company. Thus, the cost of the tariff will be borne by demanders, suppliers, and import firms (as well as retailers, and everyone else involved in the supply chain). However, if a tariff on a product is imposed on just one country (China, for example), production may simply shift to another country (such as Vietnam).

Do the benefits to a country from imposing tariffs exceed the costs? Or do the costs exceed the benefits? In theory, if a government has a lot of information on supply and demand and how both respond to tariffs, it could find the optimal tariff that would benefit the country, though at the expense of people in other countries, and the costs to those people exceeds the benefits to the country that imposed the tariff.

Then, there’s the issue of retaliation. When the U.S. imposes tariffs on products imported from other countries, those countries might retaliate and impose tariffs on goods and services that they import from the U.S. In that case, everyone is worse off, and the gains from comparative advantage are lost. Despite the worldwide decline in tariffs over the past 80 years, both the U.S. and other countries still protect certain products from foreign competition. The U.S. has high tariffs on pickup trucks from other countries to protect large U.S. automakers from foreign competition. The tariff on pickup trucks was originally a retaliation by the U.S. for a tariff that Germany placed on imported chicken, pricing U.S. chicken out of their market.

As it turns out, many economists and politicians have judged the benefits of tariff reductions to exceed the costs. That is why the U.S. government has been the world’s leader in reducing tariffs all over the world from the 1940s to the 2010s, under the principle of reciprocity—we reduce our tariffs on their goods if they reduce their tariffs on our goods. That led U.S. tariffs on imported goods to decline from about 15 percent on average 100 years ago to about 1.5 percent in 2024, with a similar decline on foreign tariffs on U.S. goods.

The most complex issue with tariffs is their impact on the overall balance of trade. The U.S. has a huge trade deficit with the rest of the world. We import much more than we export, with an average trade deficit of 3 percent of our GDP over the past decade. Countries that sell many goods to the U.S. spend the funds they earn to buy U.S. financial assets. The danger from higher U.S. tariffs is that it may reduce foreigners’ willingness and ability to buy our bonds, especially U.S. government bonds, making it more expensive to finance our huge U.S. government budget deficit. Of course, that could also affect the value of the dollar against other currencies, leading to even further impacts on trade between countries.

Do tariffs help create domestic jobs? The answer is yes, but at a high cost to consumers. A great example is the case of washing machines in 2018. The U.S. imposed a tariff on imported washing machines, and U.S. prices for washing machines rose by about the amount of the tariff, roughly $90; and since dryers are a complementary good, their prices went up by about the same amount. Most importantly, Samsung, LG, and Whirlpool increased their production in the U.S., so the goal of the tariff seemed to be achieved. With 1,800 new jobs created, the policy was a success. But the price was high. The U.S. government received $82 million annually in additional tariff revenue and consumers paid $1.5 billion in higher prices. That’s a net cost to the economy of $815,000 per job created per year.

The case against tariffs might seem clear cut, but there is one major issue that is unresolved in support of tariffs and against free trade. Because of comparative advantage, many companies in industries like steel and textiles have shut down plants in the U.S. and relocated to other countries. Labor is cheaper there (even though foreign workers are not as productive as U.S. workers), so they start producing their products in other countries like China or Vietnam. But what about the U.S. workers left behind? Shouldn’t we care about them? The answer is: yes, we should. In fact, it is explicit in U.S. law that the government can provide assistance to communities left behind. So, when manufacturers abandoned cities in the U.S. Midwest, and they became centers of the opioid crisis in the U.S., the government should have come in and provided training and jobs to those displaced workers. But the government failed those workers completely and left them to suffer on their own. Targeted programs to help displaced workers are needed as a complement to free trade, to prevent societal disruptions.

In summary, tariffs are a complicated subject. The bottom line is that historically, the U.S. government has been a champion of lower tariffs across countries on a reciprocal basis. Lower tariffs are economically efficient and make consumers all over the world better off. Higher tariffs on particular products help certain workers and firms at the expense of others. A better solution to help displaced workers is for the government to help them out directly, rather than using tariffs, which distort economic decisions.