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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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.
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.
Discerning the economic impact of tariffs can be complex and depends on how numerous other actors in the economy respond to the government imposing them. Figuring out how to make the best decision in response to policies like tariffs requires understanding how they impact consumer purchase decisions as well as the costs up and down the supply chain. Economists specialize in building models of consumer demand and production costs that allow us, as observers, to make predictions about how individuals and businesses will respond to potential changes in policy, and just as importantly, allow those same individuals and businesses to respond more effectively to those policies when they are enacted.
“Either way, the most important thing to keep in mind is that, despite how tariffs are sometimes described in the news, ‘countries’ don’t pay for tariffs one way or the other — individuals and businesses do, and that includes businesses and individuals both inside and outside the US.”
— Dr. Alexander Theisen, economics professor, Grand Canyon University
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.
Reciprocal tariffs are tariffs that are designed specifically to match and counteract another country’s tariffs. Traditionally, this would take the form of, for example, the U.S. imposing a 10% tariff on products bought from China in response to China imposing a 10% tariff on U.S. products. The logic behind this would be that if countries know that any tariff they impose will be matched one-for-one by a tariff on their own goods, they will be less likely to impose those tariffs in the first place.
Some of the recently announced tariffs that are commonly referred to as “reciprocal” tariffs are not calculated just to offset tariffs from other countries, but also to (in theory) offset other “non-tariff barriers to trade” from those countries. These could include regulations, quotas or other taxes such as sales or digital services taxes that are seen as imposing a high burden or cost on U.S. businesses selling their products in those countries. These ‘reciprocal’ calculations are often debated and can vary depending on political and economic interpretations, rather than the simple 10%-for-10% example given above.
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Tariffs, put simply, are just a particular type of tax. Specifically, tariffs are a type of tax placed on imported goods when they enter a country. Some tariffs are placed on specific products (such as steel, automobiles or pharmaceuticals) regardless of where those products are bought from, others are placed on all products from specific countries of origin (such as China or Mexico) and still others are based on a combination of these factors (for example, all automobiles from Canada).
Governments can set tariffs in place for various reasons. One reason might simply be to raise revenue for the government, as with other taxes such as sales or income taxes. A more common justification given for tariffs is to protect domestic businesses from competition with foreign products, or to encourage investment in specific industries inside the country to avoid having tariffs hit their products. Finally, another commonly cited justification for tariffs is as a bargaining tactic with other countries, where the threat or possibility of tariffs being levied on a country’s products sold in the U.S. can be used to force concessions from those countries, such as lowering tariffs of their own, or changing certain policies that the U.S. disagrees with.
It’s important to realize that the motivations mentioned above often exist in tension with one another. For example, a tariff that is used primarily as a tool to extract a specific concession from another country is not likely to serve as either a useful revenue source or a basis for businesses to make long-term investments, as the tariffs are likely to go away when and if that country accedes to the U.S.’s demands. Similarly, a tariff can only be a reliable revenue source if the imports on which that tariff is levied continue to be purchased, which is unlikely to be the case if tariffs succeed at changing whether particular products are produced inside or outside the U.S.
If you are exploring a future in business or economics, understanding the impact of policies like tariffs provides a foundation for analyzing global trade and market strategy — a vital skill for future business leaders. Grand Canyon University’s degrees in economics and business administration are designed to teach students the competencies necessary for making decisions in our constantly shifting modern economy.
