How do tariffs work? | CNBC Explains

iPhones, umbrellas, shoes. These are just some of the common items that make up the $505 billion worth of goods that are made here in China. And are imported here to the United States.

President Trump is unapologetically adding and increasing tariffs on many imports, prompting retaliation from China and others. So how do tariffs work, and what do they mean for the economy? A tariff is a tax on items entering or leaving a country.

The money collected under a tariff is called a duty or a customs duty. And in the United States those duties are collected by the U. S.

Customs and Border Protection. Last year, U. S.

import duties totaled up to $33. 1 billion. That's 1.

4% of the total value of all imported goods. That makes U. S.

tariffs among the lowest in the world. But that doesn't mean every item entering the U. S.

is facing a 1. 4% tariff. There's a huge range.

Some items aren't taxed at all, while others, like shoes, are taxed at around 11%. And upping that 11% to something like 25 or 30% can cost the makers of these products a lot. Especially when you consider that 98% of shoes sold in the U.

S. are made overseas. Let's say I'm buying watches from China to sell at big-box retail stores here in the U.

S. Say each watch costs me $10. Add in a 20% tariff to that, and I now have to pay $12 per watch.

$2 doesn't sound like much but if my order is 15,000 watches, my total cost has now gone from $150,000 to $180,000. That 20% tariff on watches cost me an unexpected $30,000 on goods. So if tariffs cost businesses so much money, why have them in the first place?

Well, there's two main reasons. First they raise money. That revenue goes to the general fund of the U.

S. Treasury, which helps pay for running the government. Last year, the U.

S. collected almost $35 billion in duties. Number two, tariffs can help protect some domestic industries from competition abroad.

Think of it this way: if you're charging Made in China more money that makes Made in America suddenly seem more affordable. Let's go back to our watch example. If my manufacturer in China is sending over a batch of watches that cost me $12 instead of $10, I might find a cheaper way to make them here in the U.

S. to avoid paying that 20% tariff. But my supplies used to make the watch are likely going to need to be imported, likely, still from China.

And those supplies probably will have their own tariffs too. You can see how this can get complicated. There's another option.

I could also potentially buy from another country that's not subject to the tariffs on products from China, like India or Vietnam. That's bad news for China. But it's not just China that Trump has been after.

When the U. S. president introduced billions of dollars in new tariffs, countries like Canada and Mexico, as well as the European Union, were quick to react and retaliate.

So why is he kicking up the controversy with America's biggest allies? Trump says he wants to dramatically reduce the U. S.

' trade deficit with other countries. A trade deficit is the amount by which a country's imports exceed the value of its exports. Trump is hoping that by introducing drastic tariffs it will reduce the size of the U.

S. ' trade deficit, and he's particularly focused on China. The U.

S. -China trade deficit is estimated to be $370 billion. He hopes to reduce it to $200 billion by 2020.

So what does all this mean for consumers? When tariffs are put into effect, the person likely paying for that increase in cost is you and I. A number of American companies have said increased tariffs will hurt their businesses, and ultimately they'll have to increase prices for consumers.

In the weeks following Trump's announcement, prices went up on items ranging from a can of Coke to toilet paper and kitchen towels. And some companies like Kimberly-Clark, which makes Huggies and Kleenex, have even lowered their annual forecasts. And the tariffs could badly hurt Chinese companies and their products too.

Some of the largest items that the U. S. is shipping to China include things like soybeans, aircraft and electrical machinery.

So, when China retaliated by announcing a 25% tariff on U. S. -made airplanes.

That was a direct hit to Boeing, and the company's stock price fell on the news. Boeing is selling planes to China Southern Airlines Group, which plans to buy more than 300 aircraft in the next three years. So with higher tariffs on U.

S. planes, it could buy a larger share of airplanes from say France's Airbus instead. The vast majority of economists surveyed by a Reuters poll said that import tariffs would do more harm to the U.

S. economy than good. Yet, like most things with President Trump, he's standing his ground, as governments, companies and consumers scramble to see what's next.

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