Q&A: What Are Tariffs and How Will They Affect Us?

04 February 2025

By Bryan McKenzie


Negotiations between leaders in Mexico, Canada and the U.S. on Monday put a 30-day pause on President Donald Trump’s promised tariffs that would increase U.S. taxes on goods from Mexico and Canada each by 25%.

The Trump administration on Monday said it would delay the tariffs against those countries after leaders agreed to bolster cooperation along their borders with the U.S. A 10% tariff on goods from China is scheduled to take effect 12:01 a.m. Tuesday.

According to the White House, the tariffs are in response to “the extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl” that created a national emergency under the International Emergency Economic Powers Act.

Tariffs have long been both a revenue source for the U.S. and a tool for shaping international relations, but they may also have consequences for the national economy and cost-conscious consumers.

UVA Today talked with Rodney Sullivan, executive director of the Mayo Center of Asset Management at the University of Virginia’s Darden School of Business, to find out more about the tariffs and how they may affect Americans.

Headshot of Rodney Sullivan

Rodney Sullivan, Executive Director for the Mayo Center of Asset Management

Q. What is a tariff and how does it differ from a tax?

A. A tariff is a levy or duty that a government imposes on imported goods. When a product crosses a country’s border, the government charges this fee before the product can enter the domestic economy. A tariff is essentially a type of tax on imported goods when they are brought into the country from abroad.

A tariff is different from other taxes like sales, income and property taxes. Tariffs directly affect the price of imported goods, which can lead to higher consumer prices and can alter trade dynamics and international relations. They are also used to indirectly protect domestic industries by making foreign products less competitive. So, in addition to being a source of revenue, they can protect domestic industries, counteract unfair trade practices and act as leverage in negotiations.

Q. How have tariffs traditionally been used in the U.S.?

A. Early in U.S. history, tariffs were a major source of federal revenue. However, with the introduction of more effective revenue mechanisms like the federal income tax (especially after its establishment with the 16th Amendment in 1913), the reliance on tariffs for funding decreased.

Following the Great Depression, the approach to tariffs changed and they became more of a tool to influence economic policy. More specifically, U.S. tariff policy shifted from a focus on revenue sources to a tool for trade policy, such as addressing perceived unfair trade practices, instruments in trade negotiations, protecting industries and safeguarding national interests.

Q. How do U.S.-levied tariffs affect the nation’s economy?

A. Tariffs, whether imposed by the U.S. or by foreign governments, can impact a domestic economy in various important ways, both directly and indirectly, affecting consumers, businesses and overall economic activity. Among the most common effects are higher consumer prices. Prices rise because some portion of the additional cost imposed by a tariff is typically passed on to consumers. This means higher prices for consumers for everyday goods.

Also, many companies rely on imported components and raw materials as inputs for their products. Tariffs on these inputs can raise production costs, which may then be passed on to consumers. One example is the U.S. auto industry, which relies heavily on Canadian car parts in the automobile manufacturing process.

Another important implication is that tariffs imposed by one country may lead to retaliatory tariffs or other measures by trading partners, raising the possibility of a trade war. This would in turn harm global economic growth and lead to job losses.

Q. How do the new tariffs compare to previous tariffs?

A. The new set of tariffs announced by the Trump administration represents a significant escalation in U.S. trade policy compared to previous measures. They are very broad in scope, imposing a 25% duty on all imports from Mexico and Canada, except for Canadian energy products, which will face a 10% tariff. A 10% tariff was also slapped on all imports from China aimed at a vast array of products. They are part of a strategy to address perceived unfair trade practices and concerns over intellectual property theft and trade imbalances.

Q. What should we expect to happen?

A. These developments are bound to weigh on U.S. economic growth unless trade negotiations between these three trading partners move quickly to reverse the tariffs. Trade is not a large portion of U.S. nominal gross domestic product, but is interconnected with intermediate prices, labor costs and the revenues of domestic producers.

Should the tariffs not be reversed in short order, the likely impact will be weakened economic growth for the U.S. and its trade partners, eliminated jobs and increased consumer costs. The largest potential impacts will be in the agriculture, automotive and energy sectors.

Lastly, retaliatory measures from Canada, Mexico and China are expected, as seen during previous trade disputes. This could further disrupt supply chains and global trade flows, thus harming economic growth further.

The comprehensive nature of these tariffs risks igniting broader trade conflicts, potentially destabilizing international markets.

This article originally appeared in UVA Today.

About the University of Virginia Darden School of Business

The University of Virginia Darden School of Business prepares responsible global leaders through unparalleled transformational learning experiences. Darden’s graduate degree programs (MBA, MSBA and Ph.D.) and Executive Education & Lifelong Learning programs offered by the Darden School Foundation set the stage for a lifetime of career advancement and impact. Darden’s top-ranked faculty, renowned for teaching excellence, inspires and shapes modern business leadership worldwide through research, thought leadership and business publishing. Darden has Grounds in Charlottesville, Virginia, and the Washington, D.C., area and a global community that includes 18,000 alumni in 90 countries. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.

 

Press Contact

Molly Mitchell
Senior Associate Director, Editorial and Media Relations
Darden School of Business
University of Virginia
MitchellM@darden.virginia.edu