How do tariffs work and will Trump's plan cause inflation?

President-elect Donald Trump has said he will impose sweeping new tariffs on Mexico, Canada and China as soon as he takes office.

During his 2024 presidential campaign, Trump pledged to use tariffs to boost U.S. businesses—proposing a 60 percent tariff on goods from China and a 10 percent tariff on everything else the United States imports.

On Monday, the president-elect announced his plan to impose a 25 percent tax on all products entering the U.S. from Canada and Mexico, and an additional 10 percent tariff on goods from China, as one of his first executive orders when he returns to office on January 20, 2025.

Newsweek has contacted a Trump spokesperson for comment via email.

What Are Tariffs?

Tariffs are taxes imposed by a country on imports, usually charged as a percentage of the price a buyer pays a foreign seller.

Trump has insisted that tariffs are paid for by foreign countries, but it is importers—companies in the U.S.—that pay tariffs, and the money goes to the U.S. Treasury. Those companies typically pass their higher costs on to their customers by hiking prices. However, tariffs also hurt the exporting countries by making their products costlier and harder to sell abroad.

Are Tariffs Good for the U.S. Economy?

Economists have said that tariffs can be harmful to the U.S. economy, and studies have found that Trump's proposed tariffs would have a negative effect.

"President-elect Trump may want to impose tariffs to encourage investment and work, but his strategy will backfire," Erica York, a senior economist and research director with Tax Foundation's Center for Federal Tax Policy, wrote in an article earlier this month.

"Tariffs will certainly create benefits for protected industries, but those benefits come at the expense of consumers and other industries throughout the economy," she added.

In September, the Peterson Institute for International Economics (PIIE) reported that with the tariff proposals Trump campaigned on, the U.S. economy would be almost a percentage lower than otherwise by 2026.

"The damage is magnified if other countries retaliate with higher tariffs on their imports from the United States," the report said. Other estimates have also found that the proposed tariffs would harm the economy.

A PIIE report released in May said the proposed tariffs "would reduce after-tax incomes by 3.5 percent for those in the bottom half of the income distribution and cost a typical household in the middle of the income distribution about $1,700 in increased taxes each year."

The report said the tariffs, along with Trump's proposal to extend tax cuts, "would increase the distortions and burdens created by the rounds of tariffs levied during the first Trump administration (and sustained during the Biden administration), while inflicting massive collateral damage on the U.S. economy."

Do Tariffs Cause Inflation?

Economists have said that Trump's tariff proposals would send prices surging and make inflation worse.

In June, a coalition of Nobel Prize-winning economists warned that Trump's economic proposals would "reignite'' inflation, which has come close to the Federal Reserve's 2 percent target since peaking at 9.1 percent in June 2022.

Economists have warned that Trump's tariffs could dramatically raise prices for American consumers on a wide array of goods.

The PIIE report released in September estimated that the tariffs could make inflation 1.3 percent points higher next year than it otherwise would have been.

Why Is Trump Planning to Impose Tariffs?

Trump said he would impose the tariffs as part of his effort to crack down on illegal immigration and drug trafficking.

In a post on Truth Social, he said that "thousands of people are pouring through Mexico and Canada, bringing Crime and Drugs at levels never seen before."

Trump said the new tariffs would remain in place "until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!"

He added in a separate post that he'd "had many talks with China about the massive amounts of drugs, in particular Fentanyl, being sent into the United States—But to no avail."

Trump said Chinese officials had told him they would "institute their maximum penalty, that of death, for any drug dealers caught doing this but, unfortunately, they never followed through."

"Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America," he continued.

Scott Bessent, Trump's nominee for treasury secretary, has said imposing tariffs on countries is a means of negotiation.

In a Fox News op-ed published on November 15, Bessent wrote: "Tariffs are also a useful tool for achieving the president's foreign policy objectives. Whether it is getting allies to spend more on their own defense, opening foreign markets to U.S. exports, securing cooperation on ending illegal immigration and interdicting fentanyl trafficking, or deterring military aggression, tariffs can play a central role."