Who actually pays a 10% tariff?

Donald Trump has proposed a universal baseline tariff of ten per cent on all imports and a sixty per cent levy on Chinese goods, and corporate finance departments are arguing over what it would cost them. Politicians say foreign exporters pay tariffs. The mechanics of trade say otherwise.

Who writes the cheque

The legal answer is simple. A tariff is collected by US Customs and Border Protection from the importer of record, usually an American company, when goods cross the border. The foreign exporter never sends money to Washington. It bears part of the cost only if it cuts its own price to keep the sale, and whether it does so depends on how much bargaining power each side holds. That is the question the data from the last trade war can answer.

Importers pick up the bill

Evidence from the 2018–2019 trade war shows that import duties were paid almost entirely by domestic importers. They either accepted thinner gross margins or passed the cost on to consumers through higher shelf prices. For retailers and manufacturers, a universal tariff is an unhedged rise in operating costs, and it lowers the quality of their earnings.

Several academic studies reached the same conclusion using detailed customs records. Work by economists at the Federal Reserve Bank of New York, Princeton and Columbia, among others, found that the prices foreign suppliers charged barely fell after the duties were imposed, so the full tariff showed up in the price American importers paid. Research on retail prices found that stores absorbed a good part of that increase at first rather than passing it all on at the till. The cost was borne at home, divided between company margins and consumers.

What the margin arithmetic looks like

The damage depends on how much of a company's costs come from abroad. Take a retailer whose imported goods cost it half of what it charges customers. A ten per cent duty on those goods consumes five percentage points of sales, which for a discount chain can be more than its entire operating margin. A company with the same imports from China under a sixty per cent levy would face a cost increase that no plausible efficiency drive could offset. It would have to raise prices or find new suppliers, and quickly.

Manufacturers face a subtler version of the problem. Many import components rather than finished goods, and a tariff on parts raises the cost of making things in America, which undercuts the policy's stated aim. The steel tariffs of 2018 helped domestic steelmakers but raised costs for carmakers, appliance makers and machinery firms that buy steel, and those industries employ far more people than steel production does. The washing machine tariffs imposed the same year pushed up the price of washers, and retailers raised the price of dryers too, even though dryers were not covered.

Ways companies will try to escape

Companies have three main responses, and each has limits. They can pass costs on, which works best for firms with strong brands and little competition, and worst for discount retailers whose customers shop on price. They can squeeze suppliers, which works when the supplier has few alternatives. They can move sourcing to countries not facing the higher rate, as many did after 2018 by shifting production of Chinese goods to Vietnam, Mexico and elsewhere. A universal tariff closes much of that third route, since every country faces at least the baseline duty.

Currency movements offer partial relief. During the last dispute the Chinese yuan weakened against the dollar, which offset some of the duties by making Chinese goods cheaper in dollar terms. A broad tariff would probably push the dollar up more generally, since Americans would buy fewer foreign goods and so need less foreign currency. That softens the blow for importers but hurts American exporters, whose goods become dearer abroad, and it does nothing for companies whose suppliers price in dollars anyway.

Quality over headline earnings

For investors, the risk goes beyond the headline hit to profits. Companies often front-load imports before a tariff takes effect, as many did in 2018, inflating inventories and flattering one quarter at the expense of the next. Inventory accounting delays the cost increase by a quarter or two, so reported margins may look fine initially and then fall sharply. Guidance becomes harder to trust when management teams cannot know which exemptions will survive negotiations. That uncertainty argues for lower valuations on import-heavy sectors even before any tariff is imposed.

The winners would be domestic producers competing with imports, which gain pricing power, and companies with pricing power strong enough to pass costs on without losing volume. The losers include discount retailers, consumer electronics and apparel sellers, auto parts suppliers and any manufacturer relying on imported components. Consumers pay whatever share companies manage to pass through, and lower-income households, which spend more of their budgets on traded goods, pay proportionately more.

The best case for the policy

Supporters argue that a permanent, predictable tariff would give companies the certainty to invest in American production, and that some foreign suppliers, faced with losing the world's largest consumer market, would cut prices to stay in it. There is some truth to this. Exporters with high margins and few alternative markets can absorb part of a duty, and a policy expected to last may encourage more reshoring than temporary measures did. Supporters also point to the revenue: on more than $3 trillion of annual goods imports, even a ten per cent duty raises a substantial sum.

The 2018–2019 evidence cuts against the most optimistic version. Foreign exporters did not absorb much of the cost then, and investment in manufacturing did not surge. Revenue raised by a tariff is, by the mechanics above, revenue collected from American companies and consumers.

Signals to track

The details that matter are still unknown: whether any countries or products would be exempt, which legal authority a new administration would use, and how quickly duties would be phased in. Company commentary on sourcing plans in second-quarter results this summer, import volumes as firms decide whether to stock up early, and the dollar's reaction to polls will show how seriously the market takes the proposal.

A universal tariff would be paid by American companies. Retailers and manufacturers that rely on imports would probably see gross margins squeezed within a few quarters of it taking effect, unless they can push the cost on to their customers. Discount retailers and firms sourcing heavily from China are the most exposed, and investors would be wise to price that risk into their valuations before the first duty is collected rather than after.