A tariff is a tax placed on imported goods. Governments collect it when products enter the country. The goal is often to protect local industries, influence trade, or bring in money. But there is confusion about how tariffs work. Some say they make the country richer by bringing in revenue. The idea sounds simple, but the reality is more complicated.
The U.S. has used tariffs in different ways over time. Under President Trump, tariffs have been a major part of trade policy. His administration has imposed new tariffs on imports from Canada, Mexico, and China. These measures are meant to protect American jobs and industries. By making imports more expensive, tariffs encourage businesses and consumers to buy from domestic suppliers instead. This helps local companies compete, but it also raises costs across the economy.
But there are questions about who really pays for them. Are foreign companies the ones covering the cost? Or does the burden fall on businesses and consumers at home?
This article will explain who actually pays for tariffs and how they impact trade and the economy.
Who Pays the Tariff at Customs?
Who pays the tariff can depend on the agreement between the buyer and seller. Trade terms, known as Incoterms, decide who covers the cost. In most cases, the importer is responsible for paying duties and tariffs. However, this can vary based on the Incoterm used in the transaction. For example, under FOB (Free on Board), the buyer takes responsibility for all import duties once the goods leave the seller’s country. In contrast, under Delivered Duty Paid (DDP) the seller covers all duties and taxes, delivering the goods to the buyer without additional import costs.
How Tariffs Affect Businesses and Consumers
Impact on Importers
Importers pay the tariff as soon as their goods reach customs. It is an extra expense they must cover before products can enter the market. If they absorb the cost, their profit margins shrink. To avoid this, many look for ways to adjust.
Some importers shift their sourcing to countries with lower or no tariffs. A clothing company bringing in fabric from China might switch to suppliers in Vietnam. Others try to renegotiate contracts with their suppliers to offset some of the cost. If that is not possible, businesses may cut costs in other areas. This could mean reducing staff, lowering production expenses, or even scaling back on new orders.
Tariffs force businesses to make tough decisions. They must either absorb the cost, pass it down the supply chain, or find a way around it. Each choice affects pricing, supply chains, and how products reach the market.
Impact on Wholesalers and Retailers
When tariffs increase costs, wholesalers and retailers must adapt. A clothing company that shifts fabric sourcing from China to Vietnam may benefit from lower tariffs but still faces higher overall costs if the new supplier charges more. These increased costs ripple down the supply chain.
Wholesalers purchasing fabric in bulk now pay higher prices. To maintain their profit margins, they pass these costs to clothing manufacturers, who in turn increase the price of finished garments. By the time these products reach retailers, the price has risen further. Retailers must then decide whether to pass these additional costs on to consumers or absorb some of the impact to keep sales stable.
If prices climb too high, some retailers may discontinue certain products. A store that previously sold affordable cotton shirts may remove them from shelves if customers are unwilling to pay the higher price. This limits consumer choices, pushing shoppers to consider alternatives. Some may opt for a cheaper synthetic blend, while others may stretch their budget for premium cotton. Ultimately, tariffs influence both the product selection available in stores and what consumers can afford to buy.
Impact on Consumers
Consumers feel the impact of tariffs every time they shop. When businesses pay more for materials, the extra cost moves down the line. Prices go up, and shoppers have fewer options.
The clothing company that once sourced fabric from China had to switch to Vietnam. Even with lower tariffs, fabric costs more than before. Wholesalers raised prices, retailers followed, and now shoppers see the difference on price tags. A cotton shirt that used to cost $20 may now be $25. Some people pay the higher price, while others look for cheaper alternatives.
This pattern happens in other industries too. A 20% tariff on electronics means higher prices for laptops and smartphones. Retailers adjust their prices to cover extra costs, making everyday items more expensive. If businesses stop importing certain products, shoppers have fewer choices. Some may hold off on big purchases, while others switch to different brands. The cost of tariffs does not stop at the border. It reaches the checkout counter.
Do Foreign Exporters Pay Tariffs?
Depending on the Incoterms used, foreigner exporters in general do not pay for the tariffs. The cost falls on the importer at the border. But that does not mean exporters are not affected. If their products become too expensive, they risk losing sales.
Some foreign suppliers lower their prices to stay competitive. A Chinese electronics company selling laptops to the U.S. may offer discounts to help importers cover the tariff.
Others try to work out deals with importers. A fabric supplier in Vietnam might agree to share some of the extra costs caused by tariffs. This helps importers avoid raising prices too much while allowing exporters to keep selling in the same markets. These adjustments help businesses stay afloat, but they do not remove the impact of tariffs. The cost still needs to be covered somewhere in the chain.
Retaliatory Tariffs: Who Pays for Trade Wars?
When countries engage in trade disputes, they often impose retaliatory tariffs on each other’s goods. For instance, in February 2025, President Trump announced a 10% tariff on all Chinese imports, aiming to address national security concerns. In response, China imposed additional tariffs of 15% on U.S. coal and liquefied natural gas, and 10% on crude oil and agricultural machiner. (Source: China counters with tariffs on US products, apnews.com)
Similarly, the U.S. imposed a 25% tariff on imports from Canada and Mexico, citing issues related to unlawful migration and fentanyl flows. In retaliation, Canadian Prime Minister Justin Trudeau announced 25% tariffs on $155 billion worth of U.S. goods, including beer, wine, lumber, and appliances. These measures were set to begin with $30 billion taking effect immediately and the remaining $125 billion in the following weeks. (Source: Trump launches trade war with tariffs on Mexico, Canada and China, reuters.com)
These retaliatory tariffs can significantly impact domestic producers by limiting their access to foreign markets, leading to decreased sales and potential financial strain. Consumers will face higher prices and reduced product availability as a result of these trade wars.
Economic Effects of Tariffs
Positive Effects
- Protects Domestic Industries
When tariffs make imports more expensive, local businesses have less competition from foreign companies. This gives them a better chance to grow and sell more products. A steel mill in the U.S. may see higher demand if foreign steel becomes too costly. - Encourages Local Production
Higher prices on imports push companies to source materials and manufacture products domestically. This can lead to more jobs in industries like textiles, machinery, and electronics. Factories may expand, and new businesses may open to meet demand. - Generates Government Revenue
Tariffs bring in money that governments can use for public services. The funds collected at customs go into the national budget. This revenue can help pay for infrastructure, education, or other programs without raising taxes elsewhere.
Negative Effects
- Higher Prices for Consumers
When businesses pay more for imported goods, those costs move down the supply chain. Shoppers see the difference when buying groceries, electronics, or clothing. A higher tariff on fabrics means a cotton shirt that once cost $20 may now be $25. - Supply Chain Disruptions
Many industries depend on raw materials and parts from different countries. When tariffs increase costs, businesses must adjust their supply chains. A car manufacturer that once imported steel from Canada may have to switch suppliers or pay more, slowing production. - Potential Inflation of currency
When businesses face rising costs, they adjust by increasing prices. This happens across multiple industries, making everyday goods more expensive. If too many prices go up at once, the cost of living rises, affecting wages and spending power. - Trade Tensions and Retaliation
Other countries often respond to tariffs with their own. If the U.S. places tariffs on Chinese electronics, China may impose new taxes on American agricultural products. Farmers, manufacturers, and exporters may lose access to foreign buyers, reducing sales and jobs.
Who Ultimately Pays the Tariff?
The person buying it in the store most often ends up paying for the tariff.
The idea that tariffs make a country richer is not new. Adam Smith, often called the father of modern economics, argued against this thinking in The Wealth of Nations, published in 1776. He believed free trade helped nations grow by allowing them to specialize in what they do best. He warned that tariffs protect some industries at the expense of others, making goods more expensive for consumers. His argument still holds today. Tariffs may shield certain businesses, but they raise costs across the economy.
The effects of tariffs do not stop at the companies paying them. They change how businesses operate and how consumers shop. Prices rise, choices shrink, and industries shift. The impact reaches everyone, from importers to the person buying a shirt at the store.
