President Donald Trump has promised to make tariffs a central part of his economic policy agenda. Already, the United States has proposed, implemented, paused and restarted tariffs on Canada, China and Mexico, leading to uncertainty and confusion.

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We break down everything you might want to know about tariffs, including how they impact shippers, importers and consumers and how to limit any negative impacts on your business’ supply chain and operations.

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What is a tariff?

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A tariff is a tax or duty on imported goods from other countries. The tax is paid when the goods enter a country. 

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Governments typically use tariffs to protect their economy’s homegrown industries by making foreign-made or imported products more expensive. For example, a tariff on strawberries might make another country’s strawberries more expensive than domestically grown strawberries, which would not have to pay a tariff because they are not imported.

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What are the different types of tariffs?

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Governments generally charge tariffs as a specific dollar amount or a percentage of the imported good’s value.

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Ad valorem tariffs are percentage-based taxes and increase with an item’s value. For example, a 25% tariff on smartphones might mean a $1,000 smartphone would now cost $1,250, as the tariff would be $250.

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A specific tariff is a fixed tax per unit of something. The tariff is not higher for more pricey or higher-value goods. For example, a $2 specific tariff on shoes would mean imported basic shoes and luxury or high-end shoes would have the same tariff of $2.

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Compound tariffs combine a percentage-based and fixed tax. For example, a tariff on imported household appliances might be $2 per item plus 25% of the good’s value, which means a $100 microwave would have a $27 tariff ($2 + $25, or 25% of $100) and a $250 microwave would have a $64.50 tariff ($2 + $62.50, or 25% of $250).

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What is a tariff schedule?

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A tariff schedule is a list of tariffs a government charges on imported goods entering its economy. It has detailed information about specific products or categories of merchandise, the tariff rate and any exceptions or special rules.

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Tariff schedules help importers and other businesses understand the amount of tax they must pay when their goods enter the country.

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The United States’ tariff schedule is called the Harmonized Tariff Schedule of the United States.

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Which goods are most commonly tariffed?

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A government can apply a tariff on any imported good. However, tariffs are common for agricultural products, cars, clothing, electronics, textiles and natural resources.

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Many governments impose tariffs to protect key industries and constituents, such as farmers, food producers and domestic manufacturers, which are generally large companies employing many people. 

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Imported natural resources and raw materials, such as aluminum, gas, oil, lumber or steel, often have tariffs because many domestic industries use them as inputs for other goods, or they are seen as crucial for natural security or economic independence. Similarly, governments might view some goods, including advanced electronics, pharmaceuticals and semiconductors, as essential for protection or further economic development.

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Who pays tariffs?

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Governments charge tariffs when an imported good enters the country or economy. Importers pay the tariff.

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Generally, an importer will pass on the tariff’s cost along the supply chain, and in most cases, the final consumer pays a higher price because of all the extra costs. The final consumer price may not be the tariffed rate, as each party in the supply chain might increase costs. For example, a 10% tariff does not necessarily mean an imported item costs only 10% more than a similar domestically produced item.

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How are tariffs enforced?

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A government’s customs authorities enforce tariffs when imported goods enter a country’s borders or ports of entry. Officials generally have to classify the goods based on the tariff schedule and determine the goods’ value to charge the correct tariff. They also collect the tax before allowing imports to enter the country.

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The U.S. Customs and Border Protection enforces tariffs and compliance in the United States.

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Why do countries implement tariffs?

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Countries often use tariffs to protect domestic industries and promote local purchasing. Making imported goods more expensive can encourage consumers to buy domestically instead.

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Tariffs can also maintain or increase jobs in domestic industries by encouraging companies to make their goods in the country to avoid the tax. For example, a foreign company might decide to open or increase the size of a factory in another country to produce more merchandise domestically and import fewer items.

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Some governments also see tariffs as a good way to raise revenue, address trade imbalances or address political concerns with other countries.

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How can I avoid paying tariffs?

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It is challenging to avoid paying tariffs. International trade agreements or free trade zones might exempt or reduce tariffs on particular merchandise or goods manufactured or imported in a specific area.

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As a best practice, importers should ensure their goods are classified correctly by exporters and customs authorities. Similar goods may have different tariffs. Additionally, a country might charge a lower tariff based on how the goods were assembled or manufactured. For example, a company could relocate manufacturing to a region or nearby country—sometimes called nearshoring or reshoring—with more favorable trade policies.

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Businesses can also look for alternative suppliers or sources. For example, they could source raw materials from another country that is not subject to tariffs. Finally, businesses and consumers can buy domestic products or stock up on merchandise to avoid tariffs altogether.

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How do tariffs affect consumers?

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Tariffs, like other taxes, make goods more expensive. Importers might pass the added cost from the tax on to other businesses in the supply chain, such as distributors, retailers, wholesalers and others, which usually leads to a higher price for consumers.

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Consumers will spend more money for the same good, or they might choose to buy less or avoid buying the imported good altogether because the price is too high.

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Because of the added costs, imported goods might also be stocked less. Consumers could then have fewer choices or less access to goods.

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How do tariffs impact supply chains or logistics?

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Tariffs can disrupt supply chains and a company’s logistics operations. Businesses that rely on international trade could face higher costs or delays if they need to find new suppliers or relocate assembly or manufacturing.

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Tariffs can also make it hard for businesses to predict costs and plan the amount of goods they need. Companies might find that goods are more challenging to source because the added tax or alternatives are less readily or reliably available. They may also have transportation issues if customs authorities delay goods at ports of entry or a replacement source is now further away.

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Rick Chen is the director, communications at Mothership. He was previously the head of communications or company spokesperson for Credit Karma, Gusto, Metromile and Blind and has been featured in accounting, HR, insurance and tech trade publications and national outlets like CNBC, Forbes, Lifehacker, Reuters, Rolling Stone and more.