Donald Trump’s tariff announcement: What tariffs are, how they work, & their impact on businesses and prices—EXPLAINED

President Donald Trump is set to announce a comprehensive tariff plan on Wednesday (April 2), targeting potentially trillions of dollars’ worth of imported goods. While specifics regarding the scope and rate of tariffs remain unclear, Trump has dubbed the initiative “Liberation Day,” asserting that it will boost domestic manufacturing and generate trillions in federal revenue.

Ahead of Trump’s expected tariff announcement, understanding how tariffs work and their potential impact is crucial.

Understanding tariffs

Tariffs are taxes imposed by a government on imported goods. These fees are paid by US-based companies when they bring products into the country. The collected revenue goes to the US Treasury, making tariffs a source of government income. The tariff amount is calculated as a percentage of the declared value of the imported goods before they enter the United States.

For example, if a US retailer imports sneakers from China, it must pay a tariff to Customs and Border Protection before the shoes can be sold in American stores. Similarly, manufacturers that rely on imported parts or materials must pay tariffs before they can use them in production. These additional costs can then affect businesses and consumers alike.

Trump’s justification for tariffs

President Donald Trump has cited multiple reasons for imposing tariffs: He has used tariffs as a tool to:

Combat unfair trade practices – Trump claims that tariffs counteract foreign nations that impose their own tariffs on US goods.

Revamp domestic manufacturing – By making foreign goods more expensive, tariffs could encourage businesses to produce more in the US.

Generate government revenue – Trump has suggested that tariffs could replace income taxes as a major funding source for the federal government.

Address foreign policy concerns – Early in his presidency, Trump linked tariffs on Canada, Mexico, and China to their handling of fentanyl exports.

Leverage negotiations – He has used tariffs as a bargaining chip, threatening other nations with higher tariffs to secure trade or policy concessions.

How tariffs affect businesses

Tariffs increase the cost of importing goods, which impacts companies differently depending on their industry and reliance on foreign materials. Some key effects include:

Higher production costs – Many US businesses rely on imported raw materials and components. Tariffs make these inputs more expensive, leading to increased overall costs.

Reduced investments – If companies absorb the tariff costs instead of passing them to consumers, they may have less capital for expansion, research, or hiring new employees.

Automation over jobs – While tariffs aim to bring manufacturing back to the US, modern factories use automation, meaning job creation could be limited compared to past industrial booms.

Expensive domestic manufacturing – Producing goods in the US involves higher labor and regulatory costs, making it more costly than offshore production despite tariffs.

How tariffs affect consumer prices

The impact of tariffs on consumer prices depends on how businesses respond:

Price increases – Many companies pass the higher costs onto consumers, leading to more expensive goods, from everyday items like shoes to larger purchases like cars.

Business cost absorption – Some firms choose not to raise prices, but this can reduce their profitability and ability to expand, potentially leading to layoffs.

Market shifts – Consumers may switch to alternative products, while companies might source from countries not subject to tariffs.