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What Are Tariffs?

Tariffs are taxes on imported goods. They can target specific countries and be used to raise revenue, protect domestic industries or influence foreign policy. Professionals make decisions in response to tariffs and how they impact consumer purchases.

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Read time 6 minutes

Dr. Alexander Theisen

Published on Oct 1, 2025

Written By

Dr. Alexander Theisen

Instructor,

Colangelo College of Business

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Bachelor’s Degrees|Business Administration|Business Analytics and Information Systems|Business Degree|Finance|Financial Markets and Economics

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Approved and verified accurate by the Program Manager of the Colangelo College of Business on Sept. 5, 2025.

The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of Grand Canyon University. Any sources cited were accurate as of the publish date.

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Who Pays for Tariffs?

With any tax, there are a couple of different ways economists define “who pays for” or who bears the incidence of that tax. One simple way is what economists call “legal incidence,” meaning who is directly obligated to pay money to the government as a result of a tax. In the case of tariffs, those are the U.S. businesses and individuals who buy the imported products that are subject to a tariff. Tariffs are charged at their port of entry to the U.S., so any business that is buying a tariffed product (like steel, automobiles or cell phones) would be required to pay that tariff to the government to receive those goods. While importers are responsible for paying tariffs at the port of entry, the added costs are often passed down the supply chain, ultimately raising consumer prices.

Another useful way to define who pays a tax is through the concept of “economic incidence.” This is based on who ends up with less money compared to what they would have had overall if the tax had never been imposed. In the case of tariffs, the tariffs raise the cost to buyers of imported products. At the same time, those higher costs cause consumers to reduce how many imported products they buy, either because they switch to buying domestic products instead, or because they just buy less of that product overall. That reduction in demand in turn pushes down the selling price of those foreign products, which results in the overall economic burden of the tax being split to some extent between U.S. consumers and foreign sellers.

The exact extent to which the burden is split between consumers and foreign sellers depends on just how much consumers change their purchases based on the tariffs (what economists call the elasticity of demand). The more consumers respond to the cost of tariffs by buying fewer tariffed products, the more the prices of those foreign products will be pushed down by reduced demand, and therefore the more foreign sellers “pay for” the tax in the form of lower prices for their products.

The best available evidence indicates that with tariffs, the burden of the tax tends to fall primarily on U.S. consumers, though this will obviously vary in degree depending on the specific goods and countries in question.

How Do Tariffs Affect Businesses and Consumers?

In the short term, as described above, the simplest answer is that consumers pay higher overall costs for goods, which will be partially (but not entirely) offset by pushing down the price of those imported goods, with the extent of that offset determined by how elastic demand is.

The longer term presents more intriguing aspects. For some products, such as coffee or bananas, it’s not particularly easy or even possible to produce those products in the U.S. at all, so the primary impact of tariffs on those products will continue to be higher costs for those goods to U.S. consumers. For other, manufactured products like automobiles or smartphones, if the tariffs stay in place for a long period of time, that will almost certainly have an impact on businesses’ investment and location decisions.

The “best case” scenario, from the perspective of a government aiming to boost domestic production, would be that the higher cost of imported goods in certain industries would push businesses in said industries to relocate and invest within the U.S., to recapture some of the market from those higher-cost imports. However, there is no guarantee that this is necessarily the main impact of tariffs on domestic production. The “worst case” scenario would be, for industries that rely heavily on imported components and materials, it might make more sense to relocate outside the U.S. entirely, to avoid the cost of tariffs on those components and materials.

Either way, it’s important to recognize that in both cases, the relevant business decisions are being motivated by higher prices — even in the “best case” scenario outlined above, businesses are only being induced to locate and invest in the U.S. because the cost of buying their products from competitors in other countries has gone up. Therefore, any additional investment in the U.S. is being supported and paid for mostly by higher costs to consumers. This also goes to show that tariffs, to the extent that they are intended to induce businesses to invest more within the borders of the U.S., are most effective if they are tailored for that specific purpose and if they are paired with other policies that lower the cost of producing in the U.S. to begin with.