Tariffs: who ultimately pays the bill?

A tariff is formally paid at the border by the importer.

But that does not tell us who ultimately bears the economic cost a question economists refer to as tax incidence or, more specifically, tariff incidence.

Three actors can absorb all or part of the shock:

the exporting company
the importing company
the final consumer

The distribution between them is neither fixed nor fully predictable in advance.

The experience of the 2018 US tariffs provides a useful benchmark. Research associated with the National Bureau of Economic Research (NBER) found that around 60% of the tariff increase was ultimately borne by American consumers.

How is this burden distributed along the value chain? Why can consumers end up paying the largest share? And what are the wider economic consequences?

The three actors facing a tariff increase

The exporting company

An exporter can reduce its selling price to offset part of the tariff and preserve its competitiveness in the importing market.

How much room it has to do so depends largely on competitive conditions.

If its product can easily be replaced by alternatives, the company has greater pressure to cut prices in order to retain customers.

If the product has few substitutes, it may have more ability to maintain its pricing.

The importing company

The importer can absorb part of the shock by reducing its margin rather than passing the entire tariff increase on to customers.

But this strategy usually has limits.

Few companies can sustain a significant reduction in profitability indefinitely.

Tariff absorption by importers is therefore often partial or temporary.

The consumer

The consumer sits at the end of the chain.

Any part of the tariff that has not been absorbed by the exporter or importer can ultimately appear in the retail price.

The consumer has a structurally weaker position: they do not negotiate the wholesale price and generally face a simple choice between paying the new price, switching product or abandoning the purchase.

What the 2018 tariff episode showed

The tariffs introduced in 2018 provide a particularly useful case study because they generated a large body of economic research.

One important finding was that around 60% of the increase was ultimately borne by American consumers.

This result is useful in two ways.

First, it suggests that consumers can bear the largest share of the adjustment.

Businesses may absorb part of the shock, but a substantial portion can still be passed through to retail prices.

Second, it shows that tariff pass-through is not necessarily complete.

Exporters and importers may absorb part of the cost through lower prices or lower margins, softening the immediate effect on households.

This provides a useful framework for analysing more recent tariff measures: the company paying the tariff at customs is not necessarily the economic actor that ultimately pays for it.

The expected chain of economic effects

Once tariffs begin to pass through the economy, several effects can follow.

Higher short-term inflation

Higher import costs can raise the prices of imported goods and of products that depend on imported components.

This can contribute to higher consumer-price inflation in the importing country.

Pressure on household consumption

If prices rise while incomes remain unchanged, households need to adjust.

They may:

– buy fewer products
– switch to cheaper alternatives
– postpone major purchases
– reduce spending elsewhere

Tariffs can therefore affect not only prices but also consumer demand.

International spillover effects

A slowdown in American household consumption can also affect exporters around the world.

The United States is a major destination for goods produced by many economies.

If US demand weakens, the effect can spread through international supply chains and export markets.

This is why Flavien Neuvy argues that higher tariffs can ultimately prove unfavourable not only to the US economy but also to the wider global economy.

The same mechanism can be observed in sectors such as automotive, where higher trade barriers can raise costs and weigh on volumes.

A framework that goes beyond tariffs

The concept of incidence is useful far beyond trade policy.

With any indirect tax, the actor that formally pays the tax is not necessarily the actor that ultimately bears the cost.

The final burden depends on bargaining power, competition and the ability of buyers and sellers to change their behaviour.

The same reasoning can apply to:

– environmental taxes
– sector-specific contributions
– changes in VAT
– regulatory charges

In each case, the most useful question is not simply:

“Who pays the tax?”

but:

“Who ultimately bears the economic cost?”

Consumers often occupy a particularly exposed position because they sit at the end of the value chain.

Key takeaways

A tariff may be formally paid by the importer, but its economic cost can be distributed across three actors:

the exporter, which may reduce prices;
the importer, which may accept lower margins;
and the consumer, who pays whatever portion is ultimately passed through.

Research on the 2018 US tariff episode found that consumers bore a significant share of the increase.

The likely consequences include higher short-term inflation, pressure on household consumption and spillover effects for exporting economies.

The broader lesson is simple: when analysing an indirect tax, the key question is not who formally pays it, but who ultimately bears the cost.

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