By Guardian-Richard Partington -Wed 2 Apr 2025 13.38 BST

Donald Trump’s widescale import levies have spooked governments, investors and analysts alike. Here’s why...

What is a tariff?

Tariffs are border taxes charged on the import of goods from foreign countries. Importers pay them upon entry to the customs agency of the country or bloc that levies them.

The taxes are typically charged as a percentage of a product’s value. For example, a tariff of 10% on a £100 product would carry a £10 charge at the point it is brought into the country.

As well as finished goods, tariffs are levied on components and raw materials, pushing up the costs to manufacturers significantly; particularly in a world of complex supply chains where borders are crossed many times. According to the Center for Strategic and International Studies, parts such as engines, transmissions, and other car components can cross the US-Canada and US-Mexico borders up to seven or eight times.

Serving as a barrier to trade, tariffs raise the price of an imported product for businesses and consumers. The US bank JP Morgan has estimated that tariffs of 25% would raise new car prices by $4,000 (£3,092).

They provide an incentive to buy a domestic tariff-free equivalent, where possible. Countries can also use non-tariff barriers to trade; including import quotas, licences and permits, regulations, safety standards and border checks.

The introduction of tariffs by one country can often collapse into a cycle of retaliation, or even a full-blown trade war. They are often used alongside other policy tools as a means of negotiation between nations, influencing far more than just economic outcomes.

What is Trump’s strategy?

The US is the largest goods importer in the world – buying products worth $3tn in 2023. It also has the largest trade in goods deficit – when imports exceed exports – worth $1tn.

Trump has long complained the deficit reflects “unfair” practices from US trading partners, and sees it as a sign of weakness in the US economy after decades of factory production shifting overseas. He has used them as a negotiation tool to extract concessions from US trading partners.

The US’s largest trade in goods deficit with a single country is with China, worth $295bn in 2024. This was followed by the EU, at $235bn.

Trump also wants the tariffs to be “fair and reciprocal” to correct what he sees as longstanding imbalances in international trade arising from non-tariff barriers and taxes used by other countries. This includes value-added taxes (VAT), used in European nations in particular.

The president sees VAT as problematic because it is paid by customers of US-manufactured goods, while Washington does not have a similar federal tax levied on imports from overseas. However, many experts counter that VAT is paid on locally made goods as well as imports.