Tariffs: The Price Tag on Borders

If goods don’t cross borders, soldiers will. — Frédéric Bastiat

Tariffs are back in the headlines, with the U.S. slapping a sweeping 25% duty on several Indian goods. But what exactly are tariffs, and why do countries impose them in the first place?
Economics & Policy
Author

Satvik Raman

Published

August 2, 2025

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What Are Tariffs, Really?

Let’s start with the basics. A tariff is a tax imposed by a government on imports — goods coming into the country. It’s like a toll gate at the border: when foreign products enter, the government charges a fee. This fee makes imported goods more expensive for domestic buyers. That, in turn, gives local products a price advantage and is meant to protect domestic industries from foreign competition.

Tariffs can also be imposed on exports, but that’s less common.

Why Do Countries Impose Tariffs?

Governments use tariffs for several reasons — sometimes strategic, sometimes political, and sometimes just old-fashioned protectionism.

1. Protecting Domestic Industry

If local manufacturers are struggling against cheaper imported goods, a government might impose tariffs to make imports more expensive and give domestic producers a fighting chance.

2. Raising Revenue

In earlier centuries, tariffs were a major source of income for governments. Today, they’re more about policy than money, but in some developing countries, tariffs still contribute significantly to government revenues.

3. Political Leverage

Tariffs are sometimes used as a tool of economic diplomacy — or even retaliation. If one country imposes duties, the other might respond in kind, leading to a trade war.

4. National Security

Certain industries — like defense, semiconductors, or energy — are seen as strategically important. Tariffs might be used to reduce dependency on foreign suppliers.

5. Correcting Trade Imbalances

If a country imports much more than it exports (like the U.S. does from many countries), tariffs are seen as a way to curb that imbalance.

Types of Tariffs

There isn’t just one kind of tariff. Here are the main types:

  • Ad Valorem Tariff: A percentage of the value of the imported good (e.g., 25% of invoice price)
  • Specific Tariff: A fixed fee per unit (e.g., ₹50 per kg)
  • Compound Tariff: A mix of both

There are also anti-dumping duties — special tariffs imposed when an exporting country is suspected of selling goods below cost to flood the market and undercut manufacturers in the importing country.

The Double-Edged Sword

While tariffs protect domestic producers, they often hurt consumers by making products more expensive.

They can also backfire. If Country A slaps tariffs on Country B, Country B might retaliate — and the cycle can escalate into a full-blown trade war, like what we saw between the U.S. and China during 2018–2019.

Even industries that rely on imported raw materials (say, electronics manufacturers who import chips) can suffer when tariffs increase input costs.

The India–U.S. Tariff Flashpoint

Now that we’ve got the concept down, let’s zoom in on the recent news.

In July 2025, the United States imposed a blanket 25% tariff on a range of Indian goods, including steel products, engineering goods, and specialty chemicals. As discussed above, this is a type of Ad Valorem Tariff — calculated as a percentage of the product’s value.

This is part of a broader strategy by the U.S. to address what it calls “unfair trade practices” and protect its own manufacturing base. Several others were hit too, as part of a global tariff move targeting lower-cost exporters.

But the blow to India is significant because:

  • Many Indian industries depend heavily on U.S. demand
  • Indian exports already face stiff competition from China, Vietnam, and Mexico
  • The 25% duty wipes out the pricing advantage Indian exporters had

This comes just as India was trying to boost exports as part of its “Make in India” and “Atmanirbhar Bharat” push.

A Brief Timeline of India–U.S. Tariff Spats

This isn’t the first time India and the U.S. have locked horns over trade.

  • In 2018, the U.S. imposed tariffs on Indian steel and aluminum citing national security
  • India retaliated with tariffs on American almonds, apples, and walnuts
  • In 2019, the U.S. removed India from the GSP (Generalized System of Preferences) list, a program that gave India tariff-free access to U.S. markets
  • Trade negotiations have remained rocky, even as strategic cooperation (like defense) has increased

What Happens Now?

India is expected to file a complaint at the WTO and may consider tit-for-tat tariffs in response. But retaliation carries risks — especially since India’s trade with the U.S. is highly valuable. Indian exporters will have to either absorb the cost — which will cut into their profits — or pass it on to U.S. consumers, risking a drop in demand. Neither option is pleasant.

Some sectors — like specialty steel or pharma intermediates — may try to re-route exports through countries with better trade terms, but that’s not always practical.

Final Thoughts

Are tariffs a villain? Not necessarily. Used wisely, they can protect vulnerable industries, negotiate better trade terms, and even strengthen national security. But they should come with a clear strategy. When used too broadly or impulsively, tariffs create uncertainty, drive up costs, and strain relationships.

In today’s globalized world, no country is an island — supply chains stretch across borders, and trade disruptions ripple through entire ecosystems. You don’t have to be an exporter or policymaker to care about tariffs. They affect:

  • The price of goods on shelves
  • The jobs in manufacturing hubs
  • The direction of diplomacy between countries

This latest U.S. tariff move is a reminder that global trade is part economics, part politics — and sometimes, part rhetoric. And while the headlines might fade, the impact on businesses, pricing, and global relations will stick around.