What Are Tariffs? A Definition

Companies worldwide, large and small, are scenario-planning around the potential impacts of rising tariffs. While tariffs can raise the prices companies pay for select imported materials and components, as well as the prices consumers pay for imported finished goods, they can also help domestic companies by putting foreign-based competitors at a price disadvantage. This article will lay out the basic concepts behind tariffs.

What Are Tariffs?

Tariffs are border taxes imposed by governments on products imported from other countries. They can affect businesses from two directions.

When importing raw materials, components, or wholesale goods, US companies, for example, pay these duties to US Customs and Border Protection, leading to higher business costs. The Tax Foundation estimates that US import tariffs under discussion in 2025 could drive the average tariff rate from 2.4% to 17.7%.

The second direction is when US companies export their products, foreign governments may impose retaliatory tariffs, making American goods more expensive—and less competitive—in those overseas markets. During trade disputes in 2018, for example, foreign trading partners imposed retaliatory tariffs affecting an estimated $121 billion of American exports.

Governments typically impose tariffs to protect domestic companies and industries, especially ones vital to the national interest, from foreign competition. They’re sometimes levied to punish another country for “unfair” trade practices—that is, when the foreign government subsidizes producers in that country so that they can sell their goods in overseas markets below the manufacturing cost or below the price they sell their goods for domestically. Countries also use tariffs to raise incremental revenue and to apply pressure on other countries during trade negotiations.

Tariffs Explained

Companies tend to pass on some or all of the cost of import tariffs to customers. As for retaliatory tariffs abroad, studies have shown that US companies absorbed about 50% of these added costs during previous trade disputes to help them remain competitive in foreign markets.

In such uncertain tariff environments, companies often conduct scenario-planning to develop strategies that blunt the negative impact of tariffs. Short-term approaches include lobbying the US government for exceptions, negotiating with current suppliers to share any tariff burden, and building strategic inventory reserves. For the longer term, some US companies are already diversifying suppliers, shifting production locations, and exploring new export markets.

Notably, some US companies may benefit from reduced foreign competition in their home market. Examples include agriculture, steel, and oil companies with substantial US-based production, as well as suppliers of components to domestic manufacturers.