How do tariffs work?

Tariffs are taxes on imported goods collected by the importing country's government, not the exporting country

By Ambia Staley2 min readUpdated July 17, 2026

A tariff is a tax on imported goods collected from domestic importers by their own government, with costs often spreading across supply chains to consumers.

A tariff is a tax imposed by a government on goods imported from another country. When a shipment crosses the border, the importing country's customs authority calculates the tariff — typically as a percentage of the declared value of the goods — and bills the importer of record, which is usually a domestic company, not the foreign seller. That is the first, and most important, clarification about who pays: The foreign government collects nothing, and the foreign manufacturer remits nothing directly. The U.S. Treasury, for example, collects tariff revenue from U.S.-based importers.

What happens next is where the economics get more complicated. The domestic importer faces a higher cost for every unit it brings in and has three basic ways to respond. It can absorb the cost and accept a lower profit margin. It can pass the cost along to buyers — wholesalers, retailers, or end consumers — through higher prices. Or it can shift sourcing to a supplier in a country not subject to the tariff. In practice, most importers do some combination of all three, so the burden of a tariff ends up distributed across the supply chain rather than sitting cleanly with any single party.

The degree to which consumers bear the cost depends on market structure and price sensitivity. In a competitive market where buyers can easily substitute one product for another, importers have limited ability to raise prices without losing sales, which means they absorb more of the cost. Where no close substitute exists — a specialized industrial input, for instance — the importer can push more of the cost onto buyers without losing volume.

Tariffs are also used as leverage in trade disputes, not solely as revenue tools. A government might impose tariffs on a trading partner's goods to pressure that partner into changing a policy — eliminating a subsidy, dropping a digital services tax on foreign companies, or addressing forced labor in supply chains. In those cases, the tariff functions as a bargaining chip, and its economic costs are deliberately inflicted to generate political pressure. The downstream effects can extend well beyond the targeted goods — shifting where companies choose to manufacture or altering long-run investment decisions across entire industries.

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