Last week, President Donald Trump declared significant new tariffs on all U.S. trade partners, including a base tariff of 10%.
Trump referred to this initiative as “Liberation Day,” asserting that his extensive use of tariffs will encourage factories to bring production back to the United States, setting the stage for a prosperous era for the U.S. economy.
However, the announcement has shaken the markets, leading to one of the most severe stock sell-offs in history as investors recognized that Trump intended not just to increase the costs of imports but to diminish or even eliminate longstanding U.S. trade deficits — a task many economists argue is unfeasible at the proposed scale without causing global economic turmoil.
Here’s what you need to understand about Trump’s strategy, the mechanics of tariffs, who bears the costs in the near and long term, and the reasoning behind their implementation.
Understanding Tariffs
Tariffs are charges that businesses pay to the federal government for importing specific products into the United States. Since these funds are collected by the government, they are classified as a tax.
For example, a major retailer importing sneakers from China must pay a tariff to Customs and Border Protection officials at the port of entry before selling the shoes in its U.S. stores. The same applies to manufacturers importing components or raw materials for production at a U.S. facility, or food distributors bringing in fresh produce for U.S. grocery chains.
The tariff is assessed as a percentage of the product’s declared value when it entered the United States, not its retail price. The revenue collected from tariffs goes to the Treasury Department, similar to tax revenues.
Tariffs have a long history, utilized by countries for centuries to shield domestic industries from foreign competition and to generate government revenue.
This trend began to shift in the late 1990s following the establishment of the World Trade Organization and Western nations’ efforts to liberalize trade. This was aimed at lowering the prices of everyday goods in developed nations while ostensibly fostering development in less affluent countries.
Now, however, Trump aims to revert these changes. He has proposed tariffs that are more aggressive and wide-ranging than any proposed by previous presidents in modern American history — even exceeding the 1930 Smoot-Hawley tariffs, which historians argue exacerbated the Great Depression.
Trump’s Justifications for Tariffs
Trump and his administration have presented a range of justifications and inconsistent messages regarding their plans to escalate tariffs on incoming goods.
Trump has claimed these tariffs are a response to actions by other nations that restrict U.S. exports. Among the tariffs announced last Wednesday were a 20% tariff on goods from the European Union, a 34% tariff on imports from China atop existing ones, and a 46% tariff on products from Vietnam.
“For decades, our country has been looted, pillaged, raped and plundered by nations near and far, both friend and foe alike,” Trump stated in the White House Rose Garden. “American steelworkers, autoworkers, farmers, and skilled craftsmen — we have many of them present here today — have suffered immensely. They have watched helplessly as foreign leaders have stolen our jobs, foreign cheaters have ransacked our factories, and foreign scavengers have dismantled the American dream.”
In his early days in office, Trump stated that tariffs on Canada, Mexico, and China were imposed as punishment for not doing more to curb the flow of fentanyl into the U.S. He has also leveraged tariffs as a bargaining tool to extract concessions from countries, threatening Colombia with a tariff if it refused to accept deportation flights for its citizens.
Trump posits that the recent tariffs serve as retaliation against nations that impose their own tariffs on U.S. goods. He claims that these tariffs would incentivize companies to move manufacturing operations to the United States by penalizing those that produce goods abroad. Trump has also suggested that tariffs could provide revenue for the federal government, even hinting they could replace income taxes.
Potential Price Implications of Tariffs
Tariffs increase the cost of doing business with overseas companies. However, firms that manufacture domestically may also be impacted, as many rely on foreign parts and materials as intermediate goods.
Whether consumers will ultimately feel the effects of these increased costs may vary across industries and products.
Much negotiation transpires between a U.S. importer, an overseas producer, and any intermediaries before a tariff is implemented, noted Craig Fuller, CEO of FreightWaves, a supply-chain consulting firm.
Several companies, such as Target, Best Buy, and Hyundai, have indicated they would transfer some of the higher costs from tariffs onto their customers. In contrast, Walmart has pressured its Chinese suppliers to reduce prices in anticipation of the tariffs, but has faced pushback.
Other companies, particularly luxury goods retailers, apply substantial markups on imported products and might ultimately choose to absorb the lower profit margins, Fuller explained. Additionally, firms that hold significant market share will decide whether to absorb the extra costs to maintain their leadership positions.
Even for companies that choose to absorb the cost of tariffs without raising prices, there will still be consequences. Such companies will have less capital available for reinvestment in their growth, which could negatively influence the labor market if it results in layoffs or stunted job creation.
Trump has minimized the potential impact of tariffs on consumer prices. When asked about foreign auto manufacturers raising vehicle prices after he announced a 25% tariff on auto imports, he remarked: “I couldn’t care less. I hope they raise their prices because if they do, people are going to buy American-made cars. We have plenty.”
Job Market Effects of Tariffs
Administration officials contend that the increased costs stemming from tariffs are justified by the anticipated rise in manufacturing jobs over the long term.
“I’m less concerned about the short term,” Treasury Secretary Scott Bessent told reporters last month. “We have strategic industries that we must maintain. We want to protect the American worker, as many of these trade agreements have not been equitable.”
Since Trump’s presidency commenced, various companies have announced plans to ramp up manufacturing in the U.S.; however, some of these initiatives were already in motion before his election, and others will take considerable time to materialize.
While tariffs might boost U.S. manufacturing in specific sectors, the jobs created could be offset by job losses in other sectors affected by higher tariff-related costs — a pattern observed during Trump’s first term, according to a Federal Reserve study.
Relocating manufacturing to the United States can also elevate production expenses, given that labor, regulatory, and construction costs are typically higher domestically, which could lead to increased prices for end products for consumers. Additionally, if companies do bring production back to the U.S., the number of jobs available may be limited due to advancements in automation. Factories that once employed tens of thousands now operate with just a few thousand workers.
Establishing manufacturing facilities in the U.S. could face higher costs due to the tariffs, making it pricier to import the necessary construction materials, components, and equipment.
Moreover, manufacturing certain products, such as shoes and T-shirts, in the U.S. at competitive prices may be nearly impossible due to a lack of available labor and supply chains capable of large-scale production.
