Tariffs: The Basics
Nathan Kessler | July 2, 2025
With up-and-down tariff policy driving headlines over the past several months, all Kansans should understand the basics and the potential impact tariffs could have on our lives.
In this two-part series, we will first discuss tariff basics. Then, in the second installment, we will explore the ways in which a sustained tariff regime could impact Kansas and the industries that are most exposed.
What Is a Tariff?
Put simply, a tariff is a tax on imports paid to the federal government by a company that imports certain goods or services from a targeted nation. For example, Apple (an American company) manufactures nearly all iPhones in China and then imports the finished product. If the U.S. government levies a 25% tariff on all imports – or just smartphones – from China, then Apple must pay an additional 25% to import those phones. That extra 25% is then remitted to the U.S. government.
In this way, tariffs act as a sort of sales tax meant to discourage certain imports. Typically, tariffs are meant to deter and penalize such imports for reasons like protecting a domestic industry or punishing unfair trade practices. If a company has no alternative to importing goods, as is the case with bananas and coffee in the United States, they may absorb some of the tariff. Most often, though, the cost is passed on to the consumer.
A (Very) Brief History of Tariffs in the U.S.
Tariffs have played a major role in U.S. trade policy since the nation’s founding. In fact, one of the earliest pieces of legislation that was passed by Congress (signed into law by President Washington) was the Tariff Act of 1789. In the aftermath of the American Revolution, the nation needed a source of revenue to repay debts it had accrued, while Treasury Secretary Alexander Hamilton recognized the need to also protect American manufacturing from foreign competition. The Tariff Act of 1789 satisfied both priorities.1
From 1789 until the dawn of the Civil War, tariffs were the source of nearly all federal revenue, and they remained an important line item in the federal budget – making up approximately half of federal revenue until 1915 when the income tax was made constitutional by the 16th Amendment.2 From this point, tariffs became much less important as a source of income for the nation, leaving them to take on more of a protectionist role in U.S. trade policy.
This new role was made clear through the Tariff Act of 1930, better known as the Smoot-Hawley Tariff Act. The intention was to safeguard domestic producers — especially farmers — from foreign competition. The outcome was a substantial reduction in global trade as other nations imposed retaliatory tariffs on the United States.
The reduction in global trade spurred by the broad-based Smoot-Hawley Tariff Act is widely credited with worsening the Great Depression as prices for goods increased while economic conditions at home and abroad deteriorated. Some argue that this may have stoked political extremism that ultimately gave rise to authoritarian leaders in Europe.3
Since the end of World War II, the United States has largely been living in the era of free trade, with a focus on reducing trade barriers and increasing international trade. This has allowed for significant wealth creation and improved quality of life around the globe.
Tariff Best Practices
Over the past 80 years, tariffs have typically taken on a much more limited role in U.S. trade policy. More aggressive tariffs are carefully targeted to protect a specific industry, with steel production being one of the most common, or to achieve a goal. A perfect example of the latter use of tariffs are those that have been in place on China for several years.
China has frequently been accused of intellectual property theft, using trade barriers and subsidies to stifle foreign competition in domestic markets, and using forced labor in manufacturing. These and other actions are seen as unfair in the global trading order and have led to retaliatory measures from the United States, including tariffs and leveraging our alliances to pressure China into changing these practices.
Using targeted tariffs (set at reasonable rates) is generally regarded as best practice. When tariffs are too broad or too high, tit-for-tat retaliation can rapidly escalate into an effective embargo between two or more nations in what is known as a trade war. In this scenario, everybody is left worse off as prices rise (with consumers often eating the inflated cost), consumer spending declines, and businesses being forced to lay off workers.
Used appropriately, tariffs can be an effective tool. Restraint, precision, and purpose are the principles that should be applied in setting tariffs. Our economic alliances are critical to our global influence, and reshaping those alliances is better done with a box cutter than with an axe.
Why Should You Care about Tariffs and Resulting Trade Wars?
With all this information in mind, the next step is understanding how it applies to Kansas and the lives of all who live here. To do this, we’ll explore a variety of state-and-industry-specific data that will make clearer how tariff-heavy policy, or even a trade war, could impact the Kansas economy.
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