Explained: What are tariffs, who pays them, and how will US enforce them

US President Donald Trump has imposed a 10 per cent baseline tariff on all imports and reciprocal tariffs on individual countries. Here's an explainer on how tariffs work and what they mean for India

US President Donald Trump on Wednesday unveiled a sweeping set of reciprocal tariffs targeting the country’s trading partners. Dubbed Liberation Day, the policy applies to over 180 nations without exception. Alongside country-specific levies, Trump announced a 10 per cent baseline tariff on all imports. As a result, the US economy and global markets are bracing for potential disruption as the policy aims to counter trade barriers imposed by other nations.

 

The new tariffs mark a significant shift from previous trade strategies and could reshape global trade flows and economic stability. With higher tariffs on key economies such as China (54 per cent), the European Union (20 per cent), and India (27 per cent), the US President has attempted to rebalance the global trade order.

 

 

A 10 per cent minimum tariff on all imports will take effect on April 5, while additional increases are scheduled for April 9. The tariffs affect sectors including pharmaceuticals, automobiles, dairy, steel, and electronics.

 

Trump’s confrontational trade stance is not new. In his first term, he imposed tariffs on China, prompting retaliatory duties on American exports. His tariff threats also influenced the renegotiation of the US-Mexico-Canada Agreement (USMCA) in 2020. Here’s a breakdown of the latest announcement and what it means for India and the world.

 

What are tariffs?

  A tariff is a tax imposed by a government on goods and services imported from other countries. When these goods enter a country, importers must pay the tariff to the government. Tariffs are usually calculated as a percentage of the product’s value (ad valorem) or as a fixed amount per unit (specific).

 

Governments use tariffs for various purposes, such as regulating trade, protecting domestic industries, generating revenue, or leveraging economic power over trading partners.

 

Why does a country impose tariffs?

  Tariffs serve several key purposes:

 

Protecting domestic industries: By making imported goods more expensive, tariffs encourage consumers to buy locally made products, shielding domestic businesses from foreign competition.

 

Generating revenue: Tariffs provide an additional source of income, especially in economies with limited taxation systems.

 

Correcting trade imbalances: Tariffs can reduce excessive imports, thereby narrowing trade deficits.

 

Exerting economic leverage: Tariffs can act as tools of foreign policy, pressuring other nations or retaliating against unfair trade practices.

 

What are the different types of tariffs?

  Governments use various types of tariffs depending on trade objectives:

 

Ad valorem tariffs: A fixed percentage of the item’s value (e.g., 10 per cent on imported cars)

 

Specific tariffs: A fixed charge per unit (e.g., $5 per kilogram of imported sugar)

 

Compound tariffs: A combination of ad valorem and specific tariffs (e.g., 5 per cent of the car’s value plus $500 per vehicle)

 

Anti-dumping tariffs: Levied on imports sold below fair market value to prevent undercutting domestic producers

 

Countervailing duties: Imposed to offset foreign government subsidies to exporters

 

Reciprocal tariffs: Levied in direct response to tariffs imposed by another country, often in trade disputes

 

Who actually pays for these tariffs?

  While tariffs target foreign goods, it is the importers who pay them at the point of entry. The cost often trickles down:

 

Consumers: Higher import costs usually lead to increased retail prices

 

Businesses: Some companies absorb tariff costs, reducing profit margins

 

Exporters: Foreign manufacturers may lower prices to remain competitive, impacting revenues

 

Production relocation: Over time, firms may shift production to the US to avoid tariffs

 

How will the US enforce its newly announced tariffs?

  Tariffs are enforced by US Customs and Border Protection (CBP) using the following mechanisms:

 

Collection at ports of entry: Tariffs are collected at 328 US ports based on the Harmonized Tariff Schedule of the United States (HTSUS), which classifies goods by type and origin

 

Importer self-reporting: Importers must declare the value, quantity, and classification of goods. CBP conducts audits to ensure compliance

 

Penalties for violations: Under Section 592 of the Tariff Act of 1930, companies that misclassify goods or underreport their value face fines or criminal charges

 

False Claims Act enforcement: Businesses that knowingly evade tariffs can face lawsuits and heavy penalties

 

How do US tariffs work in practice, and which items are exempt?

  Imported goods are assigned numeric codes under the international Harmonised System, which determines applicable tariff rates. Importers pay tariffs at customs clearance, and the funds go into the US Treasury’s General Fund.

 

CBP may penalise businesses that misdeclare product details. However, some exemptions apply:

 

Re-imported US goods: Products made in the US, exported and returned unaltered, are exempt

 

US-origin components: If a product made with US materials is manufactured abroad, tariffs apply to the total value upon re-entry

 

What are reciprocal tariffs, and how will they affect India?

  Trump has announced a 27 per cent “discounted reciprocal tariff” on Indian goods. A reciprocal tariff is levied to mirror the rate that another country imposes on the US.

 

For example, if India imposes a 54 per cent tariff on US goods, the US may respond with a 27 per cent tariff on Indian exports—half the rate India applies.

 

In some cases, reciprocal tariffs may also reflect trade deficits, not just matching rates. The US has previously imposed higher tariffs on countries with which it has significant trade gaps, citing unfair practices.

 

What happens next after Trump’s Liberation Day announcement?

  The new tariffs are likely to escalate trade tensions, especially with China, the European Union, and India. For India, the reciprocal tariff may impact major export sectors such as pharmaceuticals, textiles, steel, and electronics.

 

Global markets and supply chains are already showing signs of stress, with analysts warning of broader implications for global growth and geopolitical stability.