Last Updated on July 23, 2025 by ThePublic
The Misconception About Tariffs
Many Americans believe that tariffs are taxes paid by foreign countries to the U.S. government for the privilege of selling goods in the American market. This is a myth. In reality, tariffs are taxes imposed by the U.S. government on imported goods, and these taxes are paid by American businesses and, ultimately, American consumers. To illustrate this, let’s follow the journey of a small business owner importing goods from China and see how tariffs impact their business and customers.
A Small Business Owner’s Struggle
Consider Sarah, a small business owner in Ohio who runs a retail store selling affordable kitchenware. She imports ceramic dinnerware sets from China because they are high-quality, cost-effective, and popular with her customers. Sarah places an order for 1,000 dinnerware sets at $10 each, paying the Chinese supplier $10,000. The goods are shipped to the U.S., and Sarah is excited to stock her shelves with these items, expecting to sell each set for $20 to cover her costs and make a modest profit.
However, when the shipment arrives at U.S. customs, Sarah faces a 25% tariff on the dinnerware, a policy enacted to protect domestic manufacturers. The tariff is calculated based on the value of the imported goods, so Sarah must pay an additional $2,500 (25% of $10,000) to U.S. Customs Services to clear her shipment. Her total cost for the dinnerware is now $12,500, or $12.50 per set, before accounting for shipping, storage, and other overhead costs.
The Margin Squeeze
Sarah’s original plan was to sell each dinnerware set for $20, which would give her a profit margin of $10 per set after the $10 cost from the supplier. However, with the added $2.50 tariff per set, her cost per set rises to $12.50. If she maintains her $20 selling price, her profit margin drops to $7.50 per set—a 25% reduction. For a small business operating on thin margins, this cut is significant. Sarah’s overhead costs (rent, utilities, and employee wages) haven’t decreased, so absorbing the tariff cost isn’t feasible without risking her business’s survival.
To maintain her profitability, Sarah has no choice but to raise her prices. She increases the price of each dinnerware set to $22.50, passing the $2.50 tariff cost directly to her customers. Now, American consumers shopping at Sarah’s store pay more for the same product. The tariff, paid by Sarah to the U.S. government, becomes an indirect tax on her customers, who bear the cost through higher prices.
Who Really Pays the Tariff?
The U.S. government collects the $2,500 in tariffs from Sarah, which may seem like a win for public coffers. In 2024, U.S. Customs Services collected approximately $100 billion in tariffs, according to the U.S. International Trade Commission. But this revenue doesn’t come from foreign governments or companies, it comes from American businesses like Sarah’s, which import goods to meet consumer demand. These businesses either absorb the costs, reducing their profitability, or pass them on to consumers through higher prices. Economists estimate that over 90% of tariff costs are ultimately borne by American consumers, as businesses adjust prices to offset the tax.
This dynamic reveals a harsh truth: tariffs are effectively a hidden tax on Americans. When politicians tout tariffs as a way to make foreign countries “pay their fair share,” they obscure the reality that American businesses and consumers foot the bill. For small business owners like Sarah, tariffs create a financial burden that threatens their viability, while consumers face higher prices for everyday goods.
The Intended Purpose of Tariffs
Tariffs were historically designed to protect domestic industries by leveling the playing field. The logic is straightforward: foreign goods, often produced with lower labor or regulatory costs, can be cheaper than American-made equivalents. Without intervention, domestic manufacturers might struggle to compete. Tariffs increase the price of imported goods, making American-made products more competitive. For example, a U.S.-made dinnerware set priced at $22 might compete with Sarah’s $22.50 imported set after the tariff, encouraging consumers to buy American.
The goal is to support domestic jobs and industries, not to generate revenue for the government. However, this protection comes at a cost. When tariffs raise the price of imported goods, they also increase costs for American consumers, who may have preferred the cheaper imported option. In some cases, tariffs can even harm the industries they aim to protect by increasing costs for raw materials or components, as seen in industries like automotive manufacturing, where tariffs on steel and aluminum raised production costs.
The Bigger Picture
Tariffs are not a free lunch. While they may protect certain industries, they act as a regressive tax, disproportionately affecting lower-income consumers who spend a larger share of their income on goods. The 25% tariff on Sarah’s dinnerware sets doesn’t just affect her business, it ripples through the economy, raising prices for everyday items like kitchenware, clothing, and electronics. According to a 2023 study by the National Bureau of Economic Research, tariffs implemented between 2018 and 2020 increased consumer prices by approximately $50 billion annually, with no significant evidence of foreign countries absorbing the costs.
Moreover, tariffs can disrupt supply chains and reduce consumer choice. If Sarah can no longer afford to import her dinnerware sets, her customers lose access to a product they value. Domestic manufacturers may not always fill the gap, either due to capacity constraints or higher production costs. In the end, the consumer pays the price, literally and figuratively.
Conclusion
Tariffs are often sold as a tool to punish foreign competitors and boost the American economy, but the reality is more complex. They function as a hidden tax, paid by American businesses and passed on to American consumers through higher prices. For small business owners like Sarah, tariffs squeeze margins and force tough choices: absorb the cost and risk insolvency or raise prices and risk losing customers. The U.S. government may collect billions in tariff revenue, but it’s Americans who are footing the bill. Understanding this dynamic is crucial for an informed debate about trade policy and its impact on our wallets.