Trade Basics: Tariffs 101

Tariffs have been in the news a lot lately. It’s too soon to tell if President Donald Trump’s assertions that he will implement broad tariffs will come to pass, or how exactly that would happen.

Either way, it is important to understand what tariffs are.

Tariffs are one of the core issues that are addressed in international trade agreements, such as the agreements governed by the World Trade Organization (WTO), or the bilateral and regional agreements, like the U.S.-Mexico-Canada Agreement (USMCA), which replaced NAFTA, the North American Free Trade Agreement.

Tariffs are a policy that governments can set unilaterally, too, as President Trump proposes to do. But where tariffs are part of trade agreements, the understanding is that goods and services will move more easily (and cheaply) if both sides of the exchange — the importer and the exporter — agree in advance what the tariff level should be and abide by the outcome.

The risk of breaking the agreement to raise tariffs above the agreed levels is that trade partners will respond in kind. This happened in 2017, when China imposed tariffs on U.S. soybean imports in response to President Trump’s unilateral imposition of tariffs on Chinese steel imports.

Still, it is hard to defend trade agreements despite the value of building economic relationships among countries. The last 30 years of trade agreements have ignored or actively undermined vital public goods, including the need to protect human rights, keep climate change within manageable limits, and promote more equitable economic outcomes among and within countries. Better trade agreements would promote shared public policy objectives, including higher labor standards and cleaner production systems, while regulating rather than privileging private foreign investors.