In sixth-century Ireland, Catholic monks began to develop a rigorous way of keeping their flocks in order. Using handbooks called penitentials, they doled out punishments for crimes such as theft, heresy and demon worship, adjusted according to severity of offence and status of offender. This list of sins and prices to be paid – which typically included a period of fasting or reciting a certain number of psalms per day – was what we call Celtic “tariff” penance.

Today’s tariffs usually refer to international trade. But there’s a distinctly old-school, fire-and-brimstone flavour to those recently deployed by US President Donald Trump to bring America’s three largest trading partners into line with their “full compliance and co-operation”.

Trump has levied new tariffs on Canada and Mexico at 25 per cent for all imported goods (10 per cent for Canada’s oil and energy products). He imposed an additional tariff of 10 per cent on all Chinese goods (some of which, such as electric cars, already attracted a tariff). The president has delayed imposing the new charges on Canada and Mexico pending negotiations, but the Chinese tariff is now in effect and has already sparked a tit-for-tat trade war. From the Oval Office, Trump said the tariffs had three targets. “No.1 is the people that have poured into our country, so horribly and so much … No.2 are the drugs, fentanyl and everything else that have come into the country … and No.3 are the massive subsidies we’re giving to Canada and Mexico over deficits.”

But how do tariffs actually work? What is their effect on world trade? Will Australia be caught in the crossfire?

What are tariffs – and who pays?

For the Irish monks, tariffs played a role in confession, “in which the private recitation of sins was followed by the private performance of penance”, writes John Rodden in the liberal Catholic journal Commonweal. “Crucially, they not only adopted this practice themselves, but introduced it to the faithful outside the monastery, making it applicable to all sins and available to all sinners.” The Penitential of Finnian, from the late sixth century, listed 35 separate tariffs. A cleric, for example, who stole his neighbour’s sheep or hog should “do penance an entire year on an allowance of bread and water”.

The English word we use today actually has its origins in medieval Arabic, spread by merchants giving notice of duties owed on goods arriving at foreign ports. The word passed along trade routes: “tariff” to Sicilians, “tarifa” in Spanish and Portuguese, and “tarif” in France, where today it means “fare”. Today, tariffs are a kind of tax on imported goods. They’ve been part of the US trade system since American independence – the second law Congress passed in 1789 was to enforce a tariff of 50¢ per ton on goods imported by foreign ships (American-owned vessels paid just 6¢). Back then, tariffs helped pay off government debts accumulated during the Revolutionary War against the British.

By the early 20th century, tariffs were no longer the main earner of government revenue but a barrier to protect industries from being lost to countries that could export the same products at cheaper prices, says Richard Holden, scientia professor of economics at UNSW. In 1930, the US raised tariffs on many agricultural imports up to 60 per cent to protect farmers during the Great Depression. (The move worsened economic conditions and president Franklin D. Roosevelt reduced them two years later.)

‘There was a wave of tariff reductions around the world. As long as we don’t have tariffs then everyone’s a winner.’

Richard Holden, scientia professor of economics, UNSW

In Australia, tariffs were an early source of revenue, not least on spirits, wine and beer in the colony of NSW in 1800. After Federation, and for decades, uniform tariffs and other trade barriers, such as quotas (on how much of a good could be imported) were used to protect local industries. By the late 1970s, tariffs on cars climbed higher than 50 per cent. Opening a Mercedes-Benz plant in 1978, prime minister Malcolm Fraser, who reversed predecessor Gough Whitlam’s shortlived cuts to tariffs, said, “The government has been prepared to give these industries that have set up in Australia, and the Australian workers whose jobs depend upon them, the protection they need”.

In the 1980s, the notion of “comparative advantage” took hold – the idea that countries benefit from specialising in (and exporting) what they’re expert at making. “There was a wave of tariff reductions around the world,” says Holden. The thinking went that efficiencies meant a bigger overall economic pie for everyone. “As long as we don’t have tariffs, then everyone’s a winner.” The Australian government progressively wound back tariffs on cars from 1988 (today, they are up to 5 per cent).

While the postwar General Agreement on Tariffs and Trade (GATT) had laid the groundwork for globalisation, in 1995 the World Trade Organisation set down some broad rules. According to the WTO, tariffs in its 166 member countries have declined on average from 13.2 per cent in 1996 to 7.4 per cent in 2021.

Today, almost all countries still enforce some tariffs. Most goods that enter Australia have a “free” rate of customs duty, such as those covered by free-trade agreements. In 2024, the government abolished almost 500 “nuisance tariffs” on goods ranging from toothbrushes, clothing and sanitary products to hand tools, fridges and dishwashers. Australia does have tariffs of up to 5 per cent not just on cars but on textiles, electronics and rubber goods such as tyres, among other products. The highest tariff is 40 per cent, applied to goods imported from Russia or Belarus following Russia’s invasion of Ukraine. In 2023, Foreign Affairs Minister Penny Wong extended the tariffs until October this year, saying the “punitive trade measures shows Australia’s unwavering determination to diminish President Putin and Russia’s ability to fund this illegal and immoral war”.

Australia has also been subject to sudden tariffs, not least in 2020, when China famously slapped more than 200 per cent on Australian wine, 80 per cent on barley, and 40 per cent on cotton, citing anticompetitive practices while Australia claimed political tensions were to blame. The tariffs were finally lifted in 2024.

‘Importers either absorb those costs or they pass it on to the American consumer.’

Hayley Channer, director of economic security, University of Sydney

Importers generally pay tariffs at border crossings, ports and airports where customs officials audit goods. In many countries, money is deducted from the importing companies automatically as the product arrives. When a government introduces tariffs, agencies (such as Border Force in Australia) are tasked with implementing them.

In Australia, imports of most products worth less than $1000 pay no tariffs. Trump’s latest moves have included ending the US equivalent – a “de minimis exemption” – on packages from China. Parcels worth less than $US800 had been free from customs inspection and tariffs. The US Postal Service then briefly halted packages from China, saying it was working with customs “to implement an efficient collection mechanism for the new China tariffs”.

But who actually pays for tariffs? Importers “either absorb those costs or they pass it on to the American consumer,” says Hayley Channer, director of economic security at the University of Sydney. The last time Trump put tariffs on goods from China, most, if not all, of that cost was passed on to US consumers, according to The New York Times. In January, Capitol Economics predicted that Trump’s latest tariff threats “would, if implemented in full, trigger a rebound in consumer price inflation later this year”. Many economists oppose the use of tariffs because they might allow local producers to remain inefficient and maintain their prices while domestic consumers are left paying more as a result, fuelling inflation.

What did Trump do with tariffs this time around?

On January 20, Trump issued an executive order called the America First Trade Policy, which, among other goals, tasked the government with recommending measures such as global tariffs, both to combat America’s trade deficit and to identify any unfair trade practices. He claimed this would produce a “robust and reinvigorated trade policy” that would benefit “American workers, manufacturers, farmers, ranchers, entrepreneurs, and businesses”.

On February 1, Trump declared a state of emergency, issuing three executive orders that relied on, in part, emergency powers concerning the import of synthetic opioids to the US and human trafficking across its borders. Trump said China, Mexico and Canada were either complicit in those activities or had not been doing enough to prevent them and that tariffs were a necessary lever to force them to act. “Mexico has played a central role in these challenges, including by failing to devote sufficient attention and resources to meaningfully stem the tide of unlawful migration and illicit drugs,” Trump said. China, he alleged, provided a haven for criminal syndicates that made and exported synthetic opioids such as fentanyl to the US.

During his presidential campaign in 2024, Trump had threatened to hit China with a 60 per cent across-the-board tariff. In the event, he imposed an additional tariff of 10 per cent on all imported goods. A Foreign Ministry spokesperson for China said it deplored the move and would “take necessary countermeasures to defend its legitimate rights and interests”. China imposed tariffs on some US imports including coal, gas and some minerals – a “mild” response, according to Ahmed Albayrak at the Lowy Institute. “The US is a much bigger export market for China than China is for the US. So in a way, there wasn’t a lot that China could do to retaliate in terms of its imports from the US.” (As for the opioid crisis, China said “fentanyl is an issue for the US” that it needed to solve “instead of threatening other countries with arbitrary tariff hikes”.)

‘When you’re the pot of gold, the tariffs are very good, they’re very powerful and they’re going to make our country very rich again.’

Donald Trump

Trump did pass orders to impose tariffs of 25 per cent on all goods imported from Canada and Mexico, but swiftly postponed their implementation for 30 days, pending negotiations. Within 48 hours, Mexico had agreed to deploy 10,000 additional troops to help stop the flow of migrants and illegal drugs across the US-Mexico border. To the north, Canadians jeered during the American national anthem at sporting events and vowed on social media to boycott American products.

Canadian Prime Minister Justin Trudeau initially imposed retaliatory tariffs on US goods – targeting products in Republican-held states, such as Florida orange juice and whiskey and bourbon from Tennessee and Kentucky – but held fire following a call with Trump, which he said had been “pretty good”. Canada committed to strengthening border patrols and even appointed a “Fentanyl Czar” to work with US authorities. (Trump had threatened another nation, Colombia, with 25 per cent tariffs after President Gustavo Petro refused to allow US military planes carrying deported migrants to land. Petro initially threatened to impose the same tariffs on the US but, hours later, agreed to accept the migrants.)

All sides seemed to see the outcome, pending further discussions, as a win. “Tariffs are very powerful, both economically and in getting everything else you want,” Trump said. “When you’re the pot of gold, the tariffs are very good, they’re very powerful, and they’re going to make our country very rich again.” Trump has also flagged he “absolutely” intends to impose tariffs on the European Union, telling reporters: “The European Union has treated us so terribly.”

What’s motivating Trump on tariffs?

Trump has called tariff “the most beautiful word in the dictionary”, a sentiment he qualified at his inauguration, after what he called criticism from “the fake news” media, saying God would be first, religion second and love – “I don’t know, we have to put that No.3, I guess. And then it’s tariffs – because tariffs are going to make us rich as hell.”

This is not the first time Trump has wielded this ancient form of tax. In his first administration, he imposed targeted tariffs on goods from China, including washing machines, aircraft parts, TVs and batteries, saying it had become impossible for the US to compete with Chinese companies because of trade practices that included the “unfair” theft of American intellectual property. His actions provoked a trade war that endures today: some $800 billion of Chinese-manufactured goods were attracting tariffs even before Trump’s recent actions.

This time, his goals appear to be more complex than further stirring up trade friction with China. “One basic challenge for the countries’ officials is to work out what exactly it is that Trump wants,” observes The Economist. “His executive orders announcing the levies had described them as an emergency response to the flow of drugs and illegal immigrants into America. In subsequent comments, he emphasised economic goals.”

Trump might be trying to signal that he is a disrupter, that he wants to put everything back on the table, suggests Hayley Channer. “I think he’s showing American frustration at how globalisation hasn’t helped all Americans become wealthier, and a lot of them have lost their jobs because of lower-skilled jobs moving overseas. Now, there’s the clean energy transition, and they need to upskill. So he’s tapping into that frustration, and he’s basically trying to change the rules.”

Trump also has a track record of attacking his predecessors for running trade deficits with countries including Mexico, Canada and China. Says Holden: “He thinks that’s America ‘losing’. And you know, no economists would agree with that statement. America is a massive exporter to a whole bunch of other countries. So, OK, maybe they import a lot of kids’ toys, chainsaws and white goods from China, but they export a lot of iPhones and computers and point-of-sale equipment [used by retail cashiers] to Australia and the UK.”

But we also know Trump has several economic advisers who support tariffs more broadly. Stephen Miran, a financial strategist at an investment fund who is tipped to become head of Trump’s Council of Economic Advisers, last year outlined the case for tariffs in a detailed report. “The next Trump term presents potential for sweeping change in the international economic system and possible accompanying volatility,” he wrote. “Tariffs will likely be implemented in a manner deeply intertwined with national security concerns.” Miran’s paper, suggests Politico, “offers a preview of the economic rationale that a second Trump administration could use to sell its protectionist policies to Wall Street investors who’ve been skittish about core elements of his agenda.”

What do Trump’s tariffs mean for Australia?

You only need to consider the iPhone for a glimpse into the nature of international trade. While it might say “Made in China” on the back, its individual components will have originated in South Korea, Japan and Taiwan – and the glass front could have started life in a factory in the United States. Before the phones are finally assembled, these hundreds of elements, including the rare minerals used in their manufacture, will have crisscrossed the world. The global supply chain, says Aswini Yadlapalli, a lecturer in supply chain management at RMIT, is not so much a chain as “an interrelated web of connections”.

Introduce tariffs into this network and costs not only become more complicated to manage but can accumulate, with consequences far down the line. Take an American-made dual-cab ute that goes on sale in Australia. It might have been bolted together in the US, but it would probably contain parts made in China. When a tariff is imposed on the Chinese parts, the flow-on effect could well be a more expensive truck in the US, and again when it gets to Australia.

Moreover, in this world of interconnectedness, if those Chinese parts are made from Australian raw materials, and the tariff causes demand to drop for the trucks, the price we receive for our raw materials may well drop, too. Current US tariffs on Chinese-made electric vehicles are one factor in the fall in the global demand for the battery material lithium, which has badly affected Australian miners. In the long run, says Yadlapalli, “it has a flow-on effect on the entire world. As one product becomes expensive, the cost of living gets expensive.”

Says the Lowy Institute’s Ahmed Albayrak: “We export a lot of commodities to China, and those commodities then get processed and then end up as exports to the United States. So the extent to which we’re affected depends on the extent of the tariffs facing China. In a 10 per cent scenario, it wouldn’t do that much damage to the Australian economy. But if Trump follows through with 60 per cent tariffs across the board for Chinese goods, then we might feel that a bit more.”

Reduced demand for our exports would then reduce demand for our dollar, bringing other economic factors into play. More pressingly, uncertainty around Trump’s aggression and day-to-day pivoting has spooked all sharemarkets, ours no exception: it has seesawed since the February 1 executive orders. “The unpredictability of Trump creates extra risk, and businesses don’t like risk,” says Channer. “No matter whether tariffs are good or bad for particular industries, the unknown factor means that there’s extra risk, and that costs money.”

‘If the S&P 500 starts plunging and stays there, then that will look bad for Trump, and he won’t like that ...’

Richard Holden, UNSW

The effects on Australia are probably threefold, says Richard Holden. Investors could be in for a bumpy ride: the ASX 200 fell by 1.8 per cent after Trump’s initial tariff announcement and a further half a per cent after China announced it would retaliate. Supply chains are another pressure point. Shares in New Zealand company Fisher & Paykel Healthcare, which is listed on Australia’s exchange, fell 7 per cent after it acknowledged that 45 per cent of its goods were made in Mexico.

Then there are ripple effects from the world’s two biggest economies arm-wrestling. “Tariffs like this will make China poorer as a country. If China’s poorer as a country, then they’re going to buy less red wine, lobsters, wagyu beef, education, professional services, financial services from Australia – things we export a lot of to China,” says Holden. “Now, not as bad as if the US whacked a 25 per cent tariff on Australia, but it could be significant nonetheless.”

What’s next? “My guess,” says Holden, “is some kinds of bilateral deals will end up being done, and it probably won’t end up being around for very long, in no small part because it would just damage American consumers a great deal and would also damage the American stockmarket. And one thing we know Trump really does care about is the kind of stockmarket scoreboard. So if the S&P 500 starts plunging and stays there, then that will look bad for Trump, and he won’t like that. So my guess is, it all washes through, but the uncertainty doesn’t help in the meantime – and there’s a chance it doesn’t all wash through.”

The bottom line, says Channer: “We don’t know what Trump is going to do, and it really depends on where his attention is taken.”

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