Explainer: How do tariffs work? Who pays, who collects and more
Tariffs are taxes imposed on imported goods. Like all taxes, they are a source of government revenue. Countries have long relied on them to support local industries by making foreign products more expensive. Trump is using them as leverage to achieve foreign policy goals, too.
US President Donald Trump has defied decades of economic convention by imposing punitive tariffs on goods from some of the country's most important trading partners.
Undeterred by warnings that the measures could trigger a recession, he's now planning a second wave of import levies that could make selling into the world's biggest economy more expensive than at any point in the past century.
Here's how tariffs work, including who actually pays them and how the revenue is collected.
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What are tariffs and what purpose do they serve?
Tariffs are taxes imposed on imported goods. Like all taxes, they are a source of government revenue. Countries have long relied on them to support local industries by making foreign products more expensive. Trump is using them as leverage to achieve foreign policy goals, too.
How are US tariffs collected and enforced?
The Treasury secretary is responsible for establishing regulations on the collection of tariffs, but US Customs and Border Protection, or CBP, is the government body tasked with enforcing them at nearly 330 ports of entry across the country — which include border crossings by roads or rail, as well as seaports and airports.
Goods that cross borders are given numeric codes under a standardized nomenclature called the "international harmonized system." Tariffs can be assigned to specific product codes relating to, for example, a truck chassis, or to broad categories, such as electric vehicles. Customs agencies collect tariffs on behalf of governments.
Agents review paperwork, perform audits and collect levies and penalties. The money is collected at the time of customs clearance and deposited into the Treasury Department's General Fund. Those who fail to correctly describe the quantity, category or origin of a certain product — either on purpose or because of negligence — face penalties.
Some goods and components cross borders multiple times before becoming a finished product, such as a car with US-made parts assembled in Mexico and re-imported to the US. Under CBP rules, US-made products that are re-imported into the country without being "improved" or "advanced" in value are duty-free. Another example: Say the US exports gold to India, where it's used to make earrings. The final product will be subject to tariffs when re-entering the US. In that case, even the value of the gold would be taxed.
How much money is generated by US tariffs?
While tariffs used to be the US government's main source of revenue, over much of the past century they have comprised a tiny share of government income. As of 2024, they accounted for less than 3% of federal receipts, according to a Federal Reserve Bank of St. Louis analysis of government data.
The Tax Foundation, a nonpartisan think tank, estimates that tariffs imposed on China by Trump during his first term and expanded during Joe Biden's presidency generated $77 billion in annual revenue. White House Trade adviser Peter Navarro has said Trump's tariffs will raise $700 billion a year, about nine times current US customs revenue.
Who pays for the tariffs?
Tariffs are paid by the importer, or an intermediary acting on the importer's behalf. But it's often someone else who ultimately shoulders the cost.
Trump argues that it's the exporter who takes the hit. Research has generally found that it's US consumers and businesses that end up paying for tariffs, through higher prices. The importer may also absorb some of the cost, reducing their profits. In the long run, a foreign manufacturer may shift production to the US to avoid the tariff.
It's sometimes possible for importers to sidestep tariffs. An exemption process in the US allows companies to request relief from paying them if it would unduly hurt their business and there were no other options to buy products from another country.
What are the consequences of imposing tariffs?
The recent history of US trade with China helps explain what happens when tariffs are in place. During his first term, Trump imposed an array of tariffs on Chinese products including steel, aluminum and engines. The Asian country went from supplying about 20% of the goods the US imported before Trump's first trade war in 2018 to about only 14% of US imports in 2023.
When levies hit, companies often resort to tariff evasion. That can be done by shipping merchandise through a third country, underreporting the value of products, or mislabeling them as similar goods that have lower duty rates.
What is the "External Revenue Service" proposed by Trump?
The Trump administration has proposed the creation of a separate External Revenue Service to collect levies as part of his "America First" trade policy. Analysts have noted that tariff revenues aren't an "external" source given that the levies are paid by US-based importers, which pass at least some of the cost onto US consumers. The concept underscores Trump's desire to frame tariffs on foreign imports as a source of revenue that isn't shouldered by taxpayers.
