How these trade tools work

President Donald Trump has long been a fan of tariffs, and in his first month back in the White House he wasted no time imposing new — and relatively high — tariffs on imported goods from Canada, Mexico and China.

While Trump has suspended the tariffs on Canada and Mexico for at least one month while those countries negotiate with the United States on trade and border security, new 10% tariffs on Chinese imports began Tuesday.

And given Trump’s history, it is likely that he will wield the threat of tariffs again during his next four years in office.

CNBC spoke with trade expert David Gantz to get answers to the questions many Americans might have about tariffs after seeing a flurry of headlines about Trump’s favorite trade negotiation tool in the past week.

Gantz is the Will Clayton Fellow in Trade and International Economics at Rice University’s Baker Institute for Public Policy, and previously served as the U.S. judge on the Administrative Tribunal of the Organization of American States, as well as a consultant for the World Bank.

“It’s essentially a tax on imported goods,” Gantz said. “The tax is determined by … the value of the goods declared by the exporters.”

“For some commodities, it’s a price per ton, but on essentially all consumer goods it’s the value of the product,” Gantz said.

“Typically the value is what an independent buyer would pay to an independent seller,” he said.

Goods subject to tariffs can be commodities or other raw materials, such as steel; component products, such as automobile transmissions; and finished products, such as a Mercedes-Benz sedan.

Tariffs are usually a percentage of the value of the imported goods. For a tariff of 2.5%, the duty paid would be $2.50 for every $100 value of goods.

“Under the law, the importer is responsible for paying the tariff,” Gantz said.

A U.S. automobile company, for example, would pay the tariff on a transmission imported from Korea that the company will use to assemble an SUV.

“But” — and it’s a big but — “the importer under normal circumstances would transfer it up the line to the wholesaler, to the distributor, and ultimately to the consumer,” Gantz said.

In other words, while an importer will initially pay the tariff, another company and eventually the end user, or consumer, will foot some or all of its cost.

Gantz used the example of crude oil that is drilled in Alberta, Canada, and shipped via pipeline to the United States, where it ends up being refined into gasoline or diesel fuel.

Under Trump’s now-suspended tariffs, energy products imported from Canada would be subject to a 10% levy. If Alberta crude is selling for $60 a barrel, the additional tariff will be $6 per barrel imported.

Because profit margins on gasoline “are very, very small,” Gantz said, “the full cost of the $6 is going to be passed on” to the consumer at the pump at gas stations such as BP.

“BP is not going to absorb any part of the additional $6 or whatever it is,” he said.

In addition to gasoline, consumers are most likely to see price hikes that fully reflect the tariff rate on perishable food items such as fruits and vegetables, where profit margins likewise are low, Gantz said.

But for importers with higher profit margins, “if you have a relatively high mark-up, such as branded footwear, you may be able to absorb much of the additional cost” from tariffs without passing it all on to the consumer, he said.

“Tariffs are collected by Customs and Border Protection, a division of the Department of Homeland Security,” Gantz said.

But “it’s paid directly into an account that directly goes into the Treasury,” he said.

The Treasury Department, which previously had oversight over CPB, is responsible for collecting revenue for the U.S. government.

Not a lot — despite previously being a lot, relatively speaking.

In fiscal year 2024, the U.S. collected just $77 billion in tariffs, which amounts to about 1.5% of all federal revenue, according to a report by the Congressional Research Service.

“Over the past 70 years, tariffs have never accounted for much more than 2% of total federal revenue,” the CRS report said.

When the United States became a country in the late 18th century, tariffs “were the principal source of government revenue, because we did not have a [permanent] income tax until 1913,” Gantz said.

“For well over 100 years they were the major source of U.S. government revenues,” he said.

Tariffs during that time could be as high as 40% or more on imported goods.

Tariffs are “also very easy to collect,” Gantz said. “Import tax is collected at the border, and if you don’t pay the tax you don’t get your good.”

“They were also used over those years to protect new industries … particularly in New England.”

High tariffs meant that products imported into the U.S. had a competitive disadvantage to products sourced in the U.S.

Protectionist tariffs in the U.S. remain, such as in the steel industry, where imported steel is subjected to levies.

Tariffs were sharply lowered and became a less important source of federal revenue in the U.S. after a federal income tax was reestablished in 1913 — after having been imposed during the Civil War to pay for the costs of the conflict before being repealed in 1872.

In 1930, Congress passed the Smoot-Hawley Tariff Act, which raised levies on a broad range of imports in an effort to protect U.S. businesses during the onset of the Great Depression. The act led to retaliatory tariffs by other countries and is widely seen as exacerbating the economic misery of the Depression.

“If we raise our tariffs, other countries raise their tariffs,” Gantz said.

He said that after Trump said he would impose a 25% tariff on imports from Canada, that country “came up with a very detailed list of about $150 billion of U.S. imports that they were going to increase import taxes on,” with a focus on goods from states whose legislators supported the U.S. tariffs.

China on Tuesday said it will impose additional tariffs of 15% on coal and liquefied natural gas imported from the United States, and extra 10% duties on U.S. crude oil, agricultural machinery, and some cars.

But Gantz said that having tariffs relatively lower than they were during the 19th century can benefit U.S. consumers — and make it politically risky to raise them.

“If we have [relatively] low tariffs on goods from China, that probably saves families $2,000 or $3,000 per year on everything from television sets to Barbie dolls,” Gantz said.

And the savings from low tariffs “has been very important to low-income workers because they don’t have much money,” he said.

In his recent inaugural address, Trump lauded former President William McKinley, who served in the White House from 1897 until he was assassinated in 1901. As a member of the House of Representatives, McKinley championed the McKinley Tariff of 1890, which sharply raised import levies.

“President McKinley made our country very rich through tariffs and through talent,” Trump said in his speech.

That claim might be a tad hyperbolic.

Douglas Irwin, an economics professor at Dartmouth College who has studied McKinley’s tariffs, told The Washington Post recently, “It’s not like [Trump’s] painting a completely inaccurate picture.”

“But I think he tends to exaggerate the role of the tariff as generating all this prosperity,” Irwin said. Irwin noted that tariffs already were high before McKinley helped boost them, “So it’s not like the tariff jump-started extra growth.”

Gantz said the reason Trump recently cited for imposing tariffs — stemming the flow of migrants and the deadly opioid fentanyl from Mexico, Canada and China — is not a common rationale for tariffs.

“But they weren’t the only reason,” Gantz said.

“Trump for years has been unhappy with the trade deficit we’ve run with Canada and Mexico,” he said. “And he has also talked about how to get companies in Canada and Mexico to move to the United States.”

Trump also sees tariffs as a source of revenue that “will make it easier to decrease taxes, primarily on wealthy people,” Gantz said. “That’s the theory.”

“He loves them. He thinks they’re the solution to everything.”