How Tariffs Are Used to Protect Domestic Industries

What Are Tariffs?

Tariffs are taxes on imports that effectively raise the prices of imports, providing an edge to domestic companies in the same markets. Governments usually impose tariffs to boost domestic companies or to punish foreign competitors.

In February 2025, the Trump administration announced a set of tariffs against Canada, Mexico, and China. President Trump implemented a 25% additional tariff on imports from Canada and Mexico and a 10% additional tariff on imports from China to "hold Mexico, Canada, and China accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into [the United States]," according to a statement released by the White House.

How Tariffs Are Used

Tariffs are often used to protect struggling domestic industries against foreign competition or unfair practices such as dumping and foreign government subsidies.

There are two basic types of tariffs.

• An ad valorem tax is the most common type and is levied as a percentage of the value of the good or service.
• A specific tariff sets a fixed fee by weight or number of items.

Tariffs are paid by the importing businesses to their government, with most costs passed on to consumers of those goods or services. Tariffs are not paid by foreign companies, the exporters, or the governments that produce the goods.

Consumer Prices

Tariffs can have unintended consequences. In their attempt to promote domestic industries, tariffs hurt domestic consumers since a lack of competition increases prices. In 2018, the Trump administration imposed large-scale tariffs on several goods to protect U.S. manufacturers from foreign competition.

Washing machine tariffs revealed how import taxes can raise consumer prices on more than just the targeted imports. Research by the University of Chicago and the U.S. Federal Reserve found that while the washing machine tariffs brought in $82 million a year to the U.S. Treasury, the cost to U.S. consumers was $1.5 billion a year.

U.S. producers raised their prices on washing machines and other goods. The Fed concluded that the washing machine tariffs helped create about 1,800 manufacturing jobs, but the cost to the U.S. was about $817,000 per job.

Imposing Tariffs

Steel tariffs were imposed in 2018 to penalize China for unfair trading practices due to government subsidies that had enabled Chinese producers to export steel at low prices. Tariffs of 25% were imposed to protect the domestic industry, including factory jobs in states such as Pennsylvania.

Those tariffs helped U.S. steelmakers, but forced many U.S. companies that needed steel for their products, especially automakers, to pay higher prices, threatening products and jobs downstream.

The Bottom Line

Tariffs have historically been a tool for governments to collect revenues and protect domestic producers. Many economists argue that tariffs create market distortions that can harm domestic consumers over time through increased prices and reduced competition.