Tariffs have become a hot topic this week after US President Donald Trump announced sweeping “reciprocal tariffs” on multiple nations during what he called ‘Liberation Day’ for the US.
The term “tariff” first came up last month when Trump released a memorandum outlining his intention to implement “reciprocal tariffs” under the Fair and Reciprocal Plan 1 (FRP). Since then, it has become one of Trump’s favourite words—along with “deportation”.
What does ‘tariff’ mean?
The word “tariff” has roots in Arabic, where it originally meant “information, notification, or explanation.” It was first recorded in a Sicilian document from 1338 and appeared in a Venetian merchant guide around 1345, according to a South China Morning Post report.
In English, its earliest documentation was in William Garrard’s 1591 military manual, The Art of War, where “tariffas” referred to numerical tables used to organize soldiers. Over time, the meaning evolved, and in today’s globalized economy, a tariff is an official schedule of customs duties imposed on imports and exports.
How do tariffs work?
Tariffs are essentially taxes on imported goods. When a product enters a country, importers pay the tariff at customs.
Most tariffs are ad valorem—a percentage of the product’s value. For example, a 10% tariff on a £100 product means a £10 charge upon entry.
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Tariffs don’t just apply to finished goods—they also affect components and raw materials, increasing costs for manufacturers. In industries with complex supply chains, such as automobiles, components like engines and transmissions may cross US-Canada and US-Mexico borders up to seven or eight times, according to the Center for Strategic and International Studies.
Why do countries use tariffs?
Most nations impose tariffs, but developing countries tend to have higher tariffs to protect fragile industries and generate government revenue.
For decades, the US relied heavily on tariffs until the 1930s, when income taxes replaced them as the main source of revenue. After World War II, advanced economies moved away from tariffs due to their tendency to reduce trade, increase consumer prices, and provoke retaliation.
Trump’s tariff strategy
The US is the world’s largest importer, purchasing $3 trillion worth of goods in 2023. However, it also runs the largest trade deficit—$1 trillion—where imports exceed exports.
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President Donald Trump holds a signed executive order during an event to announce new tariffs in the Rose Garden of the White House, Wednesday, April 2, 2025, in Washington. (Photo: AP/PTI)
Trump has long argued that this deficit reflects “unfair” trade practices and has used tariffs as a negotiation tool to pressure trade partners. He also sees tariffs as a potential source of revenue to offset the cost of his tax-cut proposals. However, tariffs must be permanent to generate lasting revenue, rather than serving as a temporary bargaining chip.
The impact of tariffs
Consumers typically bear the added costs of tariffs, meaning Trump’s policy could increase US living costs.
For example, JP Morgan estimates that a 25 per cent tariff on cars could increase new car prices by $4,000 (£3,092).
Beyond the US economy, tariffs can have global repercussions. The OECD warned last month that if tariff rates increased by 10 percentage points worldwide, global output could decline by 0.3 per cent within three years. Inflation could also rise by 0.4 percentage points annually.
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A new tactic ?
Tariffs and trade barriers have shaped history, from the Boston Tea Party to World War II. Over recent decades, globalisation has weakened the role of tariffs, but Trump—who also imposed tariffs during his first term—is once again disrupting global trade.
While most economists agree that free trade has lifted over a billion people out of poverty, it has also hollowed out manufacturing and introduced environmental and social challenges tied to complex global supply chains.
