Understanding and Adapting to Trump's Tariffs

Tariffs, Explained

Tariffs are taxes on imported goods that make foreign products more expensive to purchase, encouraging consumers to buy local. Importing companies—not foreign manufacturers—pay the tariffs to U.S. Customs.

Tariffs are typically represented as a percentage of a product’s value. For example, “a 10% tariff on goods from a foreign country means a $10 product would have a $1 tax on top, taking the total cost to $11,” states the BBC. “The 145% charge on some Chinese goods would take the cost of a $10 product to $24.50. Companies that bring foreign goods into the U.S. may pass some or all of the increased cost on to customers.”

Are Tariffs the President’s Responsibility?

Yes and no.

The U.S. Constitution dictates that the power to levy taxes, including tariffs, lies with the House of Representatives. However, Congress has increasingly ceded this power to the executive branch through various pieces of legislation that have sought to empower the government to respond authoritatively to national security threats.

This is why President Trump has declared a national emergency in announcing his reciprocal tariffs: such a declaration provides a legal basis for unilateral executive action.

What Can Tariffs Achieve?

When used properly, tariffs can protect local businesses, raise government revenues, serve as leverage in trade deals, or be levied as retaliation against unfair trade practices. Because they directly manipulate the machinery of a complex and interwoven global economy, tariffs can also have impacts that extend beyond the companies or regions they target—among other effects, tariffs can drive up inflation, leading to higher prices and recessionary conditions. A 2024 study conducted by the Peterson Institute for International Economics indicated that the Trump Administration’s larger proposed tariff hikes could increase the annual costs to U.S. consumers by $2,600.

How Are Tariffs Determined?

Tariff structures depend on multiple factors, including the soundness of the objectives being pursued and the pricing policies under consideration. The Trump Administration uses reciprocal tariffs, which is the tariff rate necessary to balance the bilateral trade deficits between the U.S. and its respective trading partners. Designing an effective structure requires careful study of demand forecasts and the economic factors impacting trade agreements, as well as an unbiased evaluation of the need for reform. Furthermore, tariffs should be set at fair and reasonable rates that include considerations of the immediate and long-term political and economic impacts that could result. Well-designed tariffs are a restorative rather than a punitive tool, with clearly defined, achievable goals.

For the Trump Administration, these include the following:

• Balance persistent trade deficits with key partners
• Revitalize American manufacturing
• Improve American national defense capabilities
• Stop the flow of illicit drugs and illegal immigration from Canada and Mexico

Tariffs’ power to achieve these broad objectives lies at the center of the debate. In general, over the last century, the impacts of tariffs levied by the U.S. government have been uneven at best. History shows that, to be effective, the far-ranging impacts of tariffs must be carefully evaluated and the tariff rates be reasonable. In 1930, the Smoot Hawley Tariff Act, which set tariffs on over 20,000 imported goods at 19.8 percent, worsened the Great Depression and prompted global retaliation that saw U.S. exports decrease by 60%. Tariffs and embargoes against trade-reliant Japan in the late 1930s and early ‘40s contributed significantly to the country’s economic decline, which its imperialist leaders used to justify the occupation of Manchuria and Pearl Harbor attack. In 1947, 23 nations signed the General Agreement on Tariffs and Trade, which set a more reasonable 10.3% tariff rate. Over subsequent presidencies, tariffs have gradually decreased until the current administration, which quickly raised tariffs to what will likely be an average of 14.5%.

Upsides and Downsides

The Trump Administration expects its tariffs to reduce the trade deficit by encouraging U.S. consumers to buy more American-made goods, thereby increasing the amount of taxes raised and spurring foreign business to establish or expand U.S. operations. By some estimates, President Trump’s tariff plan will raise significant revenue—as much as $5.2 trillion over 10 years. This revenue could be used to reduce federal debt, encouraging private investment.

On the downside, the International Monetary Fund (IMF) has warned that the global economy could suffer under President Trump’s extensive tariffs, creating a bitter trade war with adversaries and allies alike. Reflecting this concern, the IMF slashed its forecast for U.S. growth to 1.8% this year, down from the 2.8% it had predicted in January.

Also, the Trump Administration’s on-again, off-again tariff policies make its trading partners uncertain about the U.S. as a reliable, long-term trading partner, as well as the strength of the U.S. dollar. Numerous amendments and exceptions since President Trump’s April 2 “Liberation Day” executive orders have not inspired confidence in U.S. strategy or provided the stability investors need to commit capital.

“There is a worry about how volatile and unpredictable U.S. policy has become, as well as increasing fears that if the high level of tariffs are to stay, the U.S. will head into a recession,” says Raghuram Rajan, ex-chief economist at the International Monetary Fund.

In response to the dollar’s uncertain future, the EU in particular is looking at contingency plans. For example, José Luis Escrivá, the governor of the Bank of Spain and a member of the European Central Bank’s governing council, has said “the bloc could emerge as a more attractive alternative.”

Creating a “Tariff-Proof” Business

At present, nothing is certain regarding tariffs, trade wars, or recessions.

However, businesses can be proactive by implementing measures that will reduce the impact of tariffs. For example, by diversifying their supply chains, companies can move away from reliance on a single supplier or region subject to higher tariff rates. Nearshoring or reshoring could also shorten supply chains and bring manufacturing closer to home.

Foreign trade zones (FTZs) provide another measure of protection.

“FTZs can be a game-changer for businesses looking to reduce tariff liabilities,” says Adrienne Braumiller, founding partner of the Braumiller Law Group. “These designated areas allow companies to store, process, or assemble goods without incurring tariffs until the products enter the U.S. market. This deferral not only provides significant cost savings but also offers greater flexibility in managing inventory.”

Braumiller also encourages tariff engineering, which involves making slight adjustments to products that would qualify them for a lower tariff rate. This typically involves changing materials, altering manufacturing processes, or even redesigning the product to fit a different classification.

However, “before jumping into this strategy,” she cautions, “conduct thorough research or seek advice from trade experts to understand how these modifications could position your products in a less tariff-laden category. This approach not only saves costs but can also add value to your products through innovative design enhancements.”

Whether the Trump Administration’s tariff actions are temporary measures meant to extract concessions from trade partners or are more permanent fixtures of U.S. economic and trade policy, businesses will seek to build greater resiliency into their operations that can insulate them from tariff liabilities while maintaining strong positions in lucrative U.S. markets. Both scenarios underscore President Trump’s confidence in zero-sum negotiations—that in any deal, there is a winner and a loser—and produce an undercurrent of uncertainty that will either dissipate downstream or emerge as a riptide.