The average effective U.S. tariff rate hit 6.6% in 2026, the highest level since 1969 (Penn Wharton Budget Model, 2026). Most people hear the word “tariff” on the news without ever getting a straight answer about what it actually means, who writes the check, or why prices at the store keep creeping up. This guide breaks tariffs down in plain language: the definition, the types, who really pays, and what changed after a Supreme Court ruling reshaped the rules in early 2026.
Key Takeaways
- A tariff is a tax on imported goods, paid by the importing company, not the foreign government or factory (USAFacts, 2026).
- U.S. firms and consumers absorbed roughly 86 to 94% of 2025 tariff costs, not foreign exporters (Liberty Street Economics, 2026).
- Tariffs added about $1,000 to the average U.S. household’s 2025 tax bill, with a projected $700 in 2026 (Tax Foundation, 2026).
- In February 2026, the Supreme Court struck down tariffs imposed under IEEPA, ruling that only Congress holds the taxing power (Tax Foundation, 2026).
What Is a Tariff, Exactly?
A tariff is a tax charged when a product crosses into a country, calculated on either its declared value or its quantity (USAFacts, 2026). The importer, the U.S. company bringing goods in, pays the tariff directly to Customs and Border Protection. The exporting country’s government never sends money to the U.S. Treasury.
That single fact trips up most people. Politicians often describe tariffs as if a foreign country “pays” them, but the invoice goes to the domestic importer of record. Whether that cost then gets passed to shoppers, absorbed by the importer’s margin, or split with the foreign supplier depends on market conditions, not on who wrote the check to Customs.
Governments lean on tariffs for three main reasons: raising revenue, shielding domestic industries from cheaper foreign competition, and applying pressure in trade negotiations. In fiscal year 2025 alone, tariffs generated more than $100 billion in federal revenue (Tax Foundation, 2026), a scale that turns a once-obscure customs line item into a meaningful piece of federal budget policy.
Tariffs aren’t a new idea the current administration invented. Before the federal income tax existed, customs duties were the primary way the U.S. government funded itself, covering the large majority of federal revenue through much of the 1800s. What’s changed since then is the size of the modern economy tariffs now touch: a 6.6% average rate applied to trillions of dollars in annual imports moves far more money than the same rate would have a century ago.
Also read: What is a trade deficit → glossary explainer on trade balance terminology
What Are the Different Types of Tariffs?
Most tariffs fall into one of three structures: ad valorem, specific, or compound (ThomasNet, 2026). Each calculates the tax differently, and the choice affects how predictable the cost is for importers planning their pricing.
An ad valorem tariff is a percentage of the good’s declared value, the most common format and the one behind headline figures like “25% on steel.” A specific tariff is a flat dollar amount per unit, say $500 per imported vehicle, regardless of how expensive that vehicle is. A compound tariff combines both: a flat fee plus a percentage. A fourth category, the tariff-rate quota, charges a low rate on a set volume of imports and a much higher rate once that volume is exceeded.
Isn’t it odd that a $30,000 car and a $90,000 car can owe the exact same specific tariff? That mismatch is exactly why most modern trade policy, including the 2025-2026 U.S. measures, relies mainly on ad valorem rates tied to product value rather than flat per-unit fees.
Tariff-rate quotas show up less in headlines but matter a lot to importers of goods like sugar, dairy, and certain textiles. A quota might allow the first 10,000 tons of a product in at a 2% rate, then charge every ton after that at 20% or more. For a business planning next year’s orders, hitting that threshold early in the year can change the entire cost structure of a shipment scheduled for December.
Also read: How customs valuation works → guide on declared value and duty calculation
Who Actually Pays for Tariffs?
Nearly 90% of the economic burden from 2025 U.S. tariffs landed on American firms and consumers, not on foreign exporters (Liberty Street Economics, 2026). Through August 2025 the pass-through rate to U.S. buyers reached 94%, before easing slightly to 86% by November as some importers renegotiated supplier contracts.
The Federal Reserve’s own tracking backs this up: retail prices on imported goods climbed gradually but steadily through 2025 as tariff costs worked their way from the customs invoice to the shelf tag (Federal Reserve, 2026). Retailers didn’t raise prices overnight; they tested how much of the new cost customers would tolerate before adjusting further.
Also read: how tariffs affect small business pricing, a guide to managing margin compression when costs and prices don’t move at the same pace.
How Much Have Tariffs Raised Prices in 2025 and 2026?
Retail prices on imported goods rose about 7 percentage points above their pre-tariff trend by late 2025, adding roughly 0.7 percentage points to the overall Consumer Price Index (Tax Foundation, 2026). Imported goods prices rose about twice as fast as domestic goods prices over the same stretch, a gap that shows up directly in categories like electronics, furniture, and apparel.
Working from the Tax Foundation’s household-cost estimates, the projected $700 average 2026 tariff tax works out to roughly $58 per month per household, a quieter but steadier drag than the sharper $1,000 hit households absorbed in 2025. That decline reflects both the pass-through slowdown and the tariff rollbacks that followed the Supreme Court’s February ruling.
Why Did the Supreme Court Strike Down Some Tariffs in 2026?
On February 20, 2026, the Supreme Court ruled 6-3 in Learning Resources Inc. v. Trump and V.O.S. Selections v. United States that the International Emergency Economic Powers Act does not give the president authority to impose tariffs (Tax Foundation, 2026). The Court held that tariff power is a branch of the taxing power the Constitution reserves for Congress, not something an emergency-powers statute can hand to the executive branch.
By that point the government had already collected roughly $160 billion in IEEPA-based tariff revenue (Penn Wharton Budget Model, 2026), which is exactly why the ruling opened the door to potential importer refund claims rather than simply ending future collection. Not every tariff disappeared, though: duties imposed under other statutes, like Section 232 on steel and aluminum, were unaffected because they rest on different legal authority.
Also read: which tariffs are still in effect after the IEEPA ruling, a tracker covering what got struck down, what replaced it, and what was never touched.
How Do Today’s Tariffs Compare to History?
At 6.6%, the 2026 average effective tariff rate is the highest since 1969, but it’s still a fraction of the peak reached under the 1930 Smoot-Hawley Tariff Act, when rates on roughly 900 categories rose by 40 to 60% (Britannica, 2026). That episode triggered retaliation from more than 25 countries and helped cut U.S. exports from $7 billion in 1929 to $2.5 billion in 1932.
History’s lesson isn’t that tariffs always spiral into a 1930s-style trade war. It’s that the pass-through to consumers and the risk of retaliation both scale with how broad and abrupt the increase is, which is exactly the comparison economists keep drawing between the 2025 measures and Smoot-Hawley.
Why Do Governments Keep Using Tariffs?
Beyond the roughly $160 billion collected through February 2026, tariffs give policymakers a lever that doesn’t require new legislation to adjust, at least until a court says otherwise (Penn Wharton Budget Model, 2026). That flexibility is also the feature courts and importers now question most directly after the IEEPA ruling.
Three motives keep tariffs in the policy toolkit: revenue for the federal budget, protection for domestic producers competing against lower-cost imports, and leverage in trade negotiations where the threat of a tariff can extract concessions before it’s ever imposed. Which of those three matters most in any given round of tariffs usually depends more on politics than on economics.
Do Tariffs Hit Small Businesses Harder Than Big Retailers?
Small importers generally absorb a larger share of tariff costs than large retailers, because they lack the purchasing volume to renegotiate supplier prices or the balance sheet to eat a margin hit while waiting out a policy change (Federal Reserve, 2026). A big-box retailer negotiating container volumes in the tens of thousands can spread a tariff increase across dozens of suppliers and product lines.
Talk to any small business owner who imports even a modest volume of goods and a familiar pattern comes up: the tariff bill arrives on a fixed schedule, but the ability to raise retail prices without losing customers does not. That mismatch is why trade associations representing smaller importers pushed hardest for exemptions and phased implementation timelines during the 2025 tariff rollout.
Large retailers also have more room to shift sourcing, moving orders from a newly tariffed country to one with a lower rate, something that takes months of supplier vetting a smaller company often can’t absorb on short notice. That’s part of why effective tariff rates by country vary so widely: importers respond to the incentive by routing around the highest rates wherever the product allows it.
Also read: how to shift sourcing to lower-tariff countries, a guide to what’s driving the move, which countries are absorbing it, and which shortcuts count as customs fraud.
Frequently Asked Questions About Tariffs
Does the exporting country pay the tariff?
No. The importer of record, typically a domestic company, pays the tariff to Customs and Border Protection based on the good’s declared value (USAFacts, 2026). Whether that cost reaches the foreign supplier at all depends on contract renegotiation after the fact.
Do tariffs raise prices for consumers?
Usually, yes. Retail prices on imported goods rose about 7 percentage points above trend in 2025, and U.S. buyers absorbed 86 to 94% of the total cost (Liberty Street Economics, 2026). The size of the increase varies widely by product category.
What happened to tariffs after the 2026 Supreme Court ruling?
The Court struck down tariffs imposed under IEEPA in February 2026, ruling that only Congress can impose them (Tax Foundation, 2026). Tariffs based on other legal authorities, such as Section 232 steel and aluminum duties, remained in place.
How much revenue do tariffs actually generate?
Tariffs brought in over $100 billion in federal revenue in fiscal year 2025, and IEEPA-based tariffs alone generated roughly $160 billion through February 2026 before the ruling (Tax Foundation, 2026). That revenue now factors into refund disputes working through the courts.
Are tariffs the same thing as sanctions?
No. Sanctions typically block trade or transactions with a country, company, or individual entirely, while tariffs simply add a tax on goods that are still allowed to cross the border. A country can face tariffs on its exports while facing no sanctions at all, and the reverse is also common.
Tariffs Explained to a Beginner
Tariffs mean a tax on imports, paid by the domestic importer, that tends to land on consumers through higher retail prices rather than on the foreign government the tariff targets. In 2025 and 2026 that meant a $1,000, then $700, hit to the average American household, an average effective rate not seen since 1969, and a Supreme Court ruling that reshuffled which tariffs can legally stay in place.
Curious what rate applies to a specific product? See our EU tariff lookup tool for typical duty rates by category, from 0% on electronics to over 70% in anti-dumping duties on some e-bikes.