The tariff debate has been sustained by a fiction: that a tax collected from an American importer will always be paid for by foreigners. It happens to be particularly convenient because tariffs are incorporated in the final price of goods long before consumers see them. An importer pays a tariff and it appears later in the price of various goods: a washing machine, car parts, or a winter coat. While that opacity makes it politically expedient, it does not change who will ultimately bear the cost, and it’ll take economists months or years of sorting through data to quantify the effects of all the tariffs. Current best estimates say that 90% of the costs are paid by American businesses and consumers.
When faced with tariffs foreign producers do sometimes cut prices, especially for goods for which American buyers have ready domestic alternatives. However, for this most recent round of tariffs, these concessions have generally been modest. In reality, after importers pay the duties at the border, businesses divide the tariff burden among lower profit margins, higher prices, reduced wages and investment, more expensive inputs and fewer purchases, or fewer products on the shelves. Consumers do not necessarily pay every dollar immediately, but the idea that foreign firms can indefinitely absorb a large new cost without changing prices or behavior, or that U.S. firms can indefinitely “eat the cost,” misunderstands how firms work.
The relatively muted initial effect of tariffs on consumer prices therefore offers little comfort. Businesses entered the tariff escalation with inventories purchased under the earlier regime, and many importers accelerated orders before higher duties took effect. Retailers could continue selling goods already in warehouses, manufacturers could draw down stockpiled components, and firms uncertain about the durability of the policy could accept temporarily lower margins rather than risk losing market share. These buffers delay pass-through but do not eliminate it. As inventories are replenished, contracts renewed, and margins restored, the tariff becomes embedded in the costs consumers pay for goods.
Ultimately, the question of who pays the tariff and the speed with which pass-through occurs depends on a host of things: the degree to which consumers and producers respond to shifts in tariffs, the availability of substitutes, concentration of the relevant market, the importance of the United States to the foreign producer, and the bargaining power of firms at each stage of production. Critically, it also depends on whether the tariff is expected to last. A company may absorb a tax it expects to disappear after a short while, but will respond differently to a tax expected to remain in place. The present tariff regime, unfortunately, has combined high tariffs with repeated changes in rates, exemptions, legal authority, and country coverage. That uncertainty raises costs independently of the tariff itself because firms have to make long-term investment decisions under tariff rules that change quickly and repeatedly. Firms like stability.
Supply chains cannot be redirected overnight by presidential decree. The adjustment is particularly difficult for goods assembled from many internationally-sourced components. The Ford F-150 illustrates the problem. Despite its status as an icon of American manufacturing, the truck relies on an integrated North American supply network in which components move repeatedly across borders; the transmission may cross the U.S.-Mexico border as many as seven times before final assembly. Any tariff applied along that chain raises the cost of producing an American truck, potentially several times over, while uncertainty over future rates makes rebuilding the supply chain a huge gamble.
Small businesses are least able to manage this adjustment. Unlike multinational corporations, a small company cannot maintain vast teams with international relations capabilities, or temporarily absorb a decline in profit. They have less bargaining power and less capital with which to build inventories or finance a costly change in sourcing, so tariff increases end up hurting small businesses and their customers most of all. A new survey found that small businesses are especially vulnerable to tariff shocks.
A tariff is a tax, and Americans are paying it. Delayed pass-through and absorbed margins have partially obscured this fact. As inventories turn over and firms adjust to an ever-changing policy that shows little sign of stability, the bill will move from balance sheets to price tags. The politically convenient story: “foreigners are paying for it” is neither supported by the mechanics of trade nor the empirical evidence, and the mechanics do not change because the story is popular.