• President Donald Trump hit Chinese imports to the US with massive tariffs on Thursday.
  • China responded with tariffs on US products.
  • Tariffs are taxes on imports designed to boost US production of goods.
  • The new tariffs will cause costs to go up for businesses that use imported goods from China — and possibly jump prices for consumer goods, too.

President Donald Trump's tariffs on $16 billion worth of Chinese goods went into effect at midnight on Thursday, prompting a swift response from the Chinese.

The Trump administration said the tariffs are necessary to protect national security and the intellectual property of US businesses. Trump has also repeatedly expressed a desire to shrink the US's trade deficit with China and protect American businesses from being undercut by Chinese producers.

The latest round of tariffs now brings the total amount of goods flowing between the two countries that are subject to duties up to $106 billion and further escalates the trade war between US and China.

Despite negotiations taking place in Washington, DC, the US is also preparing tariffs on another $200 billion worth of Chinese goods. If those tariffs go through, more than 50% of all Chinese imports to the US would be subject to tariffs.

The Chinese show no signs of backing down from Trump's threats, meaning the trade war is likely to drag on for some time.

What is a tariff?

Hans Mikkelsen, a Bank of America Merrill Lynch strategist, said the new taxes will shift the supply and demand for the various goods they are imposed on.

"International Trade 101 analyses the partial equilibrium effects of a tariff as driving a wedge between demand and supply curves, whereby the price goes up and the quantity down," he said in a note to clients.

What does it mean for businesses?

  • cost to produce their items will increase

For instance, Moog Music, the maker of the legendary Moog synthesizer, recently told customers that the tariffs on Chinese goods will dramatically increase the cost of producing their instruments. To handle this increase, Moog said, the company will either be forced to lay off workers or move its operations outside of the US.

Moog isn't the only company struggling with the tariffs, US-based nail manufacturers, lawn-equipment producers, and TV makers are all being forced to lay off workers because of the increased costs.

What does it mean for the average American?

Erica York, an analyst at the right-leaning Tax Foundation, explained that increasing the cost of inputs would raise the prices paid by consumers and the income paid to those consumers wouldn't stretch as far.