Tariffs - Who Pays?

Tariffs are paid by importers when the goods imported cross the border into the nation that has established the tariff. They are primarily a tax on consumption. Nations cannot make other nations pay taxes. They can only tax people and businesses resident in their nation.

Who bears the cost of tariffs levied on traded goods is a different issue. As economists like to say, “It depends…”.

Importers of consumer goods are often retailers or their agents. If they cannot absorb the additional cost of the tariffs, which is unlikely, they will have to pass most of the cost on in price increases to consumers. If consumers still want the good, they will have to pay the higher price.

Importers of capital and intermediate goods will usually be manufacturers, or their agents. They will have to pay the tariff on the goods when they cross the border. Unless they can absorb the cost, they will need to pass the additional cost on to retailers, and eventually to consumers.

Changes in prices affect the demand for goods. If consumers have a strong preference for a particular good, they will have no choice but to pay the higher price. This makes them worse off, however, because they will have less money to spend on other goods.

If consumers are not fussy about what they consume, they might be able to switch to an alternative good that is not subject to the tariff, but still meets their needs. However, they will still be worse off because they have been forced to shift to a product that was not previously their first choice, presumably because they did not think it was as good.

If people are forced to switch from an imported product, to a locally produced product, it is likely to be more expensive than the imported good that they used to buy. It is likely to be poorer quality relative to price. For example, if Americans are forced to switch from Chinese or Japanese-manufactured autos to American-produced ones, the quality might be poorer and the price higher. This makes them worse off, even if American manufacturers and workers benefit.

Some manufacturers of foreign manufactured goods might choose to reduce their prices to absorb the cost of the tariff in order to maintain their market share. There will be a limit to how much they can do this if their profit margins are tight. To the extent that they do choose to reduce their prices, some of the cost of the tariffs falls on them. This will reduce their profits.

If a manufacturer is unable to reduce the price sufficiently to maintain market share, they will sell less product, which will reduce their profits, unless they can quickly find alternative markets for their products.

Putting it simply:

• If buyers are indifferent to price, then buyers pay the tariffs.
• If buyers are highly sensitive to price, then sellers sell less and receive less revenue per unit sold.

However, in economics, nothing is ever simple.

Exchange Rates
The introduction of tariffs can have a significant effect on exchange rates. When Donald Trump introduced his tariffs many economists assumed that this would strengthen the US dollar. This would have the effect of making imports cheaper and exports more expensive, which counteracts the effect of the tariffs. A strong increase in the US dollar would cancel out the impact of the tariffs and prevent any price inflation.

In reality, the opposite has happened. The US dollar depreciated against the currencies of its major trading partners. This actually amplifies the effect of the tariffs by pushing up prices for increased inflation. As some economists have pointed out, allowing the US dollar to depreciate would have had a similar effect as the Trump tariffs, but it would have been more widespread.

Inflation
Inflation is a problem for most modern economies. An increase in prices caused by the imposition of tariffs might bring an increase in inflation. The Federal Reserve might need to push up interest rates to keep inflation under control. This would make people worse off and might slow the economy.

World Economy
The introduction of large tariffs can create uncertainty and disrupt world trade. The reduction of specialisation could undermine efficiency and push up the costs of economic production. If the disruption to trade is serious the world economy could go into decline. This would make everyone worse off, although the effects would be uneven.

Source: http://getrad2.blogspot.com/2025/05/tariffs-who-pays.html