Who Actually Pays for Tariffs?

By Editorial Team
Tariffs
It is kind of surprising but a lot of people don't understand tariffs

There is a persistent myth about tariffs that sounds very appealing. The story goes like this: The United States imposes a tariff on a foreign country, that country writes a check to the U.S. Treasury, and Americans reap the benefits of the revenue. It sounds like a penalty fee charged to a competitor.

That story is false.

If you walk away with only one fact, let it be this: A tariff is a tax collected at the American border, paid entirely by American companies.

The "Importer of Record"

To understand why you are paying the bill, you have to look at the paperwork. When a cargo ship docks in Los Angeles or Savannah, the U.S. Customs and Border Protection agency does not send an invoice to the government of China, Mexico, or Germany. They do not bill the foreign factory that made the goods.

By law, the tariff is charged to the Importer of Record. This is the American company trying to bring the goods into the country. It is Walmart, Ford, Home Depot, or your local small business. Before the goods can leave the port, that American company must wire the money to the U.S. government.

The foreign country pays zero.

The Chain Reaction

Once that American company pays the tariff, their cost of doing business goes up immediately. If a U.S. retailer imports a $100 vacuum cleaner and suddenly has to pay a $20 tariff tax on it, that vacuum now costs them $120.

Retailers operate on thin profit margins. They usually cannot afford to just "eat" that extra $20. If they do, they might go out of business. So, they have two choices:

Stop selling the vacuum.

Raise the price of the vacuum to cover the tax.

History and data show they almost always choose option two. The price on the shelf goes up. When you swipe your credit card, you are reimbursing the American retailer for the tax they paid to the American government.

The "Made in America" Trap

The pain isn't limited to imported products. You might think, "I’ll just buy American-made goods to avoid the tariff." Unfortunately, that doesn't always work.

American factories rely on global supply chains. A car built in Michigan uses steel, aluminum, and electronics that may be imported. If tariffs are placed on those raw materials, the cost to build that "American" car goes up. The American manufacturer then has to raise their prices just to stay afloat.

Furthermore, when import prices rise, domestic manufacturers often raise their prices to match them. If an imported washing machine goes up by $100, the domestic competitor often raises their price by $90, simply because they can. This is called the "umbrella effect." The tariff creates a cover that allows everyone—foreign and domestic—to charge you more.

The Bottom Line

Studies from the Federal Reserve and the National Bureau of Economic Research's results are consistent: Foreign exporters rarely lower their prices to help us out. The "pass-through" rate to American buyers is nearly 100%.

Tariffs are not a fee paid by foreign countries for the privilege of doing business with us. They are a sales tax paid by us for the privilege of buying what we need.

When the government announces a new tariff, they aren't sending a bill to a foreign adversary. They are forwarding the bill to you.

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