How a tariff works
Suppose the US imposes a 25% tariff on imported steel. An imported tonne of steel costing $800 now effectively costs $1,000 (the importer pays the $200 difference to the government). US steel producers can now charge closer to $1,000 without losing market share — they are shielded from foreign competition. The US government collects revenue. But: US manufacturers who use steel as an input (car makers, construction companies, appliance producers) face higher costs. Those higher costs are ultimately passed on to consumers. The tariff protects steelworkers at the expense of everyone who buys products made with steel.
Tariff escalation and trade wars
Trade wars occur when countries retaliate against each other’s tariffs with their own. The US–China trade dispute that began in 2018 is the most prominent recent example: the US imposed tariffs on Chinese goods; China retaliated with tariffs on US agricultural exports; both sides escalated. The result was higher prices for consumers in both countries, disrupted supply chains, and reduced bilateral trade — while the overall trade deficit the tariffs were designed to address did not meaningfully shrink. The broader lesson from trade history: escalating tariff wars typically damage both sides, with the bigger economy usually able to absorb the pain better.
When tariffs might be justified
Despite the general economic consensus against tariffs, arguments for them exist. The "infant industry" argument: new industries may need protection until they achieve scale and competitiveness. Strategic industries: governments may want domestic capacity in semiconductors, defence, or food regardless of cost efficiency. Rebalancing unfair competition: if a foreign government subsidises its exports, a tariff can level the playing field. National security: supply chain resilience became a bipartisan priority after COVID exposed over-reliance on single-source imports.
“The gain from international trade comes not from exports, but from imports. We export only to get the means to import.” — Milton Friedman
What this means for you
Tariffs are not abstractions — they show up in the prices you pay. When tariffs are imposed on consumer electronics, clothing, or food ingredients, the cost passes through to retail prices. During the 2025 US tariff escalation, prices on a wide range of goods rose in the US even as the government argued the foreign country was "paying" the tariff. Economically, the importer pays the tariff, and that cost is shared between the foreign exporter (who accepts a lower price), the importer (squeezed margins), and the consumer (higher prices). The split depends on how price-elastic each market is.