Tariffs Explained: Who Really Pays the Price?

Hey there! The word “tariff” is all over the  news again. In February 2025, U.

S. President Donald Trump is imposing new tariffs on  imports again. Not just on China (which, yeah, obvious), but also on Mexico, and  even U.

S. allies like Canada, Japan, and South Korea. So, what’s really going on?

You’ve probably heard the word tariff so many times, but what exactly does it mean? What  exactly is a tariff? How do they work?

Do tariffs actually work? And most importantly, how  will tariffs affect you and your daily life? Well, in this video, we will cover everything you need  to know about tariffs.

So, let’s get started! Section 1. What is a Tariff.

Well, tariff is a tax  that a government places on products coming from other countries. Sounds weird huh? Why would they  do that?

So, for example, let’s say the U. S. can produce its own bread and price it $3.

And  then, China can somehow produce and sell the exact same bread with similar quality for only $1  and sell it to the U. S. Of course, most Americans now prefer the Chinese bread as it’s cheaper,  and similar.

But this creates a problem for U. S. bakeries because they can’t compete with that  lower price.

So, in order to protect and support U. S. businesses, the U.

S. government puts tariffs  on Chinese bread. Let’s say the tariff is $3.

Now, when that $1 Chinese bread comes into the U. S. ,  it gets an extra $3 tax, making it cost $4.

Now, the U. S. bread is still $3, while the Chinese  bread is $4 because of the tariff.

So, most Americans are more likely to buy the cheaper,  local U. S. bread.

So, simply put, governments charge tariffs to make foreign products more  expensive than local ones. So, the local products now look more attractive to buyers because they  are the cheaper option. Now you already know what a tariff is, so let’s go to the next section!

Section 2. Types of Tariffs. Not all tariffs work the same, governments have different ways  to apply them.

Here are two types of tariffs. The first type is a specific tariff. A specific  tariff is a fixed fee on a product, regardless of its price.

For example, let’s say the U. S. puts  a $3 tariff per loaf of bread for every imported bread that comes from other countries.

Now, if  an imported loaf of bread originally costs $2, then adding the $3 tariff would make it  $5. If the bread costs $100 per loaf, the fixed $3 tariff still applies, making the total  price $103. No matter if the price is high or low, the tariff remains the same fixed amount.

The second type is an ad valorem tariff. An ad valorem tariff is just a fancy name  for a percentage-based tariff, so the tariff is based on percentage of the product’s  price. For example, the government might say, “Okay, we’re adding a 20% tariff on imported  bread.

” If the imported bread originally costs $10, then the 20% tariff of $10 is $2, so, adding  that $2 tariff makes the final price $12. If the bread is $100, then the 20% tariff of $100 which  is $20, so the final bread price would be $120. Now, you might have heard news about 100% or  200% tariffs, well, how does that work?

Well, a 100% tariff means if a loaf of bread originally  costs $10, a 100% tariff of $10 is $10. So, adding the $10 tariff to the original $10 price  makes the total $20. A 200% tariff means if the original price is $10, then 200% of $10 is $20,  add this $20 tariff to the original $10 price, making it $30 as the final price.

So, simply put,  the higher the price, the higher the tariff. Well, most of tariffs that you’ve heard on  the news or in daily life are mostly ad valorem or percentage tariffs because it’s  more flexible. Cheap goods get cheap tariff, expensive goods get expensive tariff rather than  specific tariffs with a fixed amount for all goods So, countries use tariffs as a tax to control  imported goods, but other than tariffs, they can use other trade barriers, which restrict  trade without adding taxes.

Examples include import quotas (where a country sets a limit  on how much product can be imported) or strict regulations (make it harder for foreign  products to enter). But unlike tariffs, other trade barriers don’t directly add a tax,  they simply set limits or make it harder for foreign goods to enter. But we’ll stay focused  on tariffs since that’s our main topic.

Now, let’s get into whether tariffs are good or bad. Section 3. Pros and Cons of Tariffs?

After understanding tariffs, you might still  be confused about whether it’s good or bad, because it seems like it’s somewhere in the  middle. Well, the answer is it depends. Tariffs don’t always have a clear-cut outcome because  their impact varies based on the situation.

Now, let’s talk first about some advantages of tariffs. The first advantage is to protect local businesses. If you ask the government why they  impose tariffs, their classic answer is to protect local or domestic businesses, and that’s kind of  true.

Without tariffs, super-cheap imports can flood the market, killing local industries and  jobs. For example, Harley-Davidson, which once had a 100% market share of heavy motorcycles, saw  its share collapse to just 15% as Japanese brands like Honda, Yamaha, Suzuki, and Kawasaki took  over with cheaper, high-quality bikes. In 1983, Harley-Davidson asked the U.

S. government  to help by imposing a 45% tariff on imported heavy motorcycles. This gave the company time to  restructure, improve quality, and modernize.

By 1987, Harley-Davidson had recovered and  even requested the removal of tariffs, proving they could now compete on their own. The second advantage is to increase government revenue. Tariffs are basically  an extra tax, and like all taxes, they bring money to the government.

Every time  an imported product gets hit with a tariff, that money goes straight to the government’s  pocket. The government can then use it for infrastructure, public services, or even boosting  the economy, at least in theory, you know yeah. The third advantage is to protect  national interest.

Tariffs are often used as a negotiation tool. For  example, the U. S.

has pressured Mexico with tariffs to push for stricter  immigration controls. If Mexico refuses, then the tariffs stay in place, if they agree,  then tariffs may be halted. Tariffs can also push companies to move production back  locally.

For example, the U. S. imposed tariffs on countries like China, hoping that  U.

S. companies would move production back home, open new factories, and create jobs in the United  States. But most of the time, this backfired as companies moved to other low-cost countries  that were not affected by tariffs, like Vietnam.

So, tariffs can protect jobs and industries,  but they also have lots of disadvantages, and that’s why lots of people are screaming  when the government imposes tariffs. So, what are the disadvantages? The first disadvantage is higher cost for consumers.

This is actually what most  people worry about. For example, the Mexican bakery needs $1 in order to make a loaf of bread,  and they sell it for $2 to American customers, which means they make $1 profit. Now, the  U.

S. government puts let’s say $2 tariffs to all Mexican bread. The Mexican bakery needs to  pay those $2 tariffs first in order to get their bread into the U.

S. market, since they only sell  $2 per bread, they can’t bear all the tariffs, so they raise the price to $4 so they can still  maintain $1 profit. Who’s paying it actually?

The American consumers who buy that Mexican bread. The second disadvantage is hurting local businesses that rely on imports. Continuing from  the previous example, there’s an American sandwich shop buys Mexican bread because it’s cheaper and  help making their sandwich also cheap.

Now that the Mexican bread costs $4 per loaf, if the shop  keeps its prices the same, it will lose money. So, the shop must raise its sandwich prices, which  could drive away customers and lower profits. So, consumers pay higher prices, and businesses  that rely on imports struggle to survive.

The third disadvantage is hurting international  relations. When one country imposes tariffs, the other country sees it as unfair and  thinks, “They’re making things harder for us, so why should we make things easy for them? ” If  the other country responds by imposing tariffs in return, this is called a reciprocal tariff. 

If both countries continue to raise tariffs and expand to more products, the situation  can escalate into a trade war. This worsens relations and makes it harder for countries  to trust and cooperate with each other. Now, you’ve understood the advantages and  disadvantages of tariffs, and you might ask, so do tariffs really work?

Well, let’s  talk about it in the next section. Section 4. Do Tariffs Work?

Well, sometimes they  work, but most of the time, they don’t work as intended. Let’s use a simple example. Let’s say there are two countries named Cookieland and Pieland.

Cookieland was famous  for its delicious chocolate chip cookies, while Pieland was known for making the best pies in the  world. People in Cookieland loved Pieland’s pies, and people in Pieland loved Cookieland’s cookies.  They traded happily, and everyone was happy.

One day, the Cookieland government noticed that  many people were buying pies from Pieland. Local pie makers in Cookieland started complaining,  saying they couldn’t compete because Pieland’s pies were cheaper and better. In response, the  Cookieland government decided to place a tariff on imported pies.

This made Pieland’s pies more  expensive, and the government hoped this would encourage people to buy local pies instead. At first, more consumers in Cookieland started buying the cheaper local pies, but loyal  customers who preferred Pieland’s pies were forced to pay more. This helped the local pie  industry in Cookieland thrive, but some of them start to get lazy as they realize they had no real  competition.

With less competition from Pieland, some pie makers in Cookieland didn’t feel the  need to improve. They could keep selling their pies even if the quality wasn’t great, because  customers had fewer choices. Cafes in Cookieland that relied on Pieland’s pies for their desserts  also struggled as costs increased.

They either had to raise prices or use lower-quality local pies. Pieland saw that its pie exports were losing customers and thought, “If Cookieland won’t let  us make money there, why should we let them make money here? ” In retaliation, Pieland placed  a reciprocal tariff on Cookieland’s cookies, making them more expensive as well.

Now, cookie  businesses in Cookieland started suffering too, losing sales in Pieland. Meanwhile, bakeries  in Pieland that use Cookieland’s cookies for their cakes also struggled with similar  condition. They either had to raise prices or use lower-quality local cookies,  both of which led to losing customers.

If Cookieland retaliated by adding more tariffs  and Pieland did the same, then a trade war would officially begin. Those relying on imported  ingredients faced higher costs, while exporters lost customers because their products became too  expensive in foreign markets. Prices kept rising, and fewer people could afford the products they  loved.

Without competition from Cookieland, some Pieland’s cookie makers also had  no reason to improve. They got lazy, and their cookies remained low quality. So, tariffs might seem like a good idea at first, but they often backfire.

They hurt businesses,  consumers, and innovation, and they usually end with both sides losing. Now, stop with the  story, let’s look at some real-world examples. Section 5.

Real Life Examples. Now, tariffs sound  like a super bad idea, so why do governments still consider them? Well, even though many tariffs  fail, some actually work!

A real-life example of successful tariffs is South Korea's strategy  to protect its automobile industry in the 1960s and 1970s. Local companies like Hyundai and Kia  struggled against established foreign brands, so South Korea imposed high tariffs on imported  cars to protect the local brands. Instead of becoming lazy, these tariffs pushed local  companies to innovate and improve their technology.

Additionally, South Korea's smart  diplomacy helped avoid retaliation, plus they got lucky as the Korean car market was still small, so  major car-exporting countries didn’t see it as a serious threat yet. This combination of innovation  and smart diplomacy allowed South Korea's tariffs to work, enabling Hyundai and Kia to compete  successfully on the international market. While a clear example of tariffs backfiring was  the U.

S. -China trade war, which began in 2018. During Donald Trump’s first term, he saw that the  U.

S. was importing far more from China than it was exporting, leading to a huge trade deficit. In  response, he imposed tariffs on Chinese imports to reduce the deficit.

However, China retaliated with  tariffs on U. S. exports, particularly agricultural products.

This hurt Chinese companies by making  their exports to the U. S. more expensive, affecting around $350 billion worth of goods  between 2018 and 2020.

At the same time, U. S. consumers, who relied on China imports, had to pay  higher prices too.

Meanwhile, U. S. farmers faced massive losses as China imposed reciprocal tariffs  on agricultural products.

According to Moody’s Analytics, the trade war led to an estimated loss  of 300,000 jobs and reduced real GDP by 0. 3%. So, who’s the winner of this trade war?

The winner is…  Vietnam! Yeah. As companies moved production out of China to avoid tariffs, many relocated  their factories to Vietnam, significantly boosting its exports to the U.

S. In the end,  both U. S.

and China lost lots of money while Vietnam got tons of new money out of nowhere. So, in conclusion. Tariffs can be useful in some cases, such as helping local industries grow,  increasing government revenue, and protecting national interests, but they can also lead  to higher costs and prices, trade disputes, and unintended economic consequences.

So,  governments must use tariffs wisely to ensure they help the economy rather than harm it. If you want me to make other videos explaining these topics, please like and subscribe. Thanks for watching.