US-Mexico tariff negotiations: What are tariffs and how do they work?

But what exactly are tariffs?

Tariffs are taxes or duties imposed by a government on imported goods and services, aiming to make foreign products more expensive than locally produced goods. This not only encourages consumers to buy domestic products but also serves as a protective measure for local industries against foreign competition.

Additionally, tariffs can help governments raise revenue.

How do tariffs work?

The mechanics of tariffs are simple: when goods cross into a country, the government charges a fee.

These fees can be either a percentage of the goods’ value (ad valorem tariffs) or a fixed amount per unit of goods (specific tariffs). Tariff rates depend on the product, its origin, and any trade agreements between the countries involved.

Governments use tariffs for various reasons, including protecting sensitive sectors like agriculture and manufacturing, or addressing trade imbalances. However, tariffs can also lead to economic tensions. In some cases, countries retaliate by imposing their own tariffs, sparking trade disputes or even trade wars, as seen in recent tensions between the US and China.

Impact on consumers and the economy

For consumers, tariffs often mean higher prices for imported goods, which can lead to inflation. While they may benefit local industries by limiting foreign competition, the broader economic impact can be mixed.

Several economists outside the administration have cautioned that the tariffs would lead to higher prices and slow down growth. Trump himself acknowledged that there would be some short-term discomfort, despite having campaigned the previous year on a promise to control inflation, reported AP.

(With inputs from BBC, NBC)