The Basics of Tariffs

An import tariff is a tax imposed by a country on imported goods or services. This tax is paid by the importing company to its country’s government and is typically calculated as a percentage of the item’s price. The chart below shows an illustration of how tariffs are added in as an additional cost to importing companies.

A country may decide to implement import tariffs for reasons including to raise revenue, protect domestic industries by discouraging consumption of foreign products, or exert political pressure. In theory, tariffs could incentivize purchasing domestic equivalents over imports. However, shifting to domestic producers may not always be possible or optimal.

The tariff itself is paid by the importing company, but the cost of a tariff, may be absorbed by the importing company, its suppliers, the end consumer, or a combination of these.

Importing companies feel the impact of tariffs through their supply chain. Many companies rely on imports for supply components, and after paying tariffs on these, their total costs are higher. Should they not fully pass this cost increase on via higher prices, this will affect the profit margins of the company. It could have the potential to alter relative competitive advantages. Similarly, companies that import to resell products, such as retail shops, will also directly feel the impact of tariffs. As the cost of imports increase, their profits will be squeezed, and/or they will likely increase prices for consumers.

Larger vs smaller companies

Larger companies are more likely than smaller companies to be able to absorb some tariff costs. Larger companies typically have more pricing power and may also be able to pressure foreign suppliers to lower their prices.

Similarly, larger companies may have a greater capability to localize their supply chain over time, thereby reducing their reliance on imports, while smaller companies may find this more challenging.

Foreign competitors

Domestic industries may face reduced competition from foreign producers whose goods or services become more expensive in the domestic country after tariffs. This could undermine an aspect of competitive advantage for foreign firms and potentially decrease their market share if consumers change purchasing behavior. Import tariffs may impact foreign exporters should they cut their prices to reduce declines in sales, thereby reducing their profit margins.

This potential loss of sales plus potential loss of market share may in turn impact foreign economies through reduced economic growth or job losses, should the scale be large enough. Impacts on foreign firms could also potentially lead to foreign economies implementing retaliatory tariffs in order protect their own trade interests.

Who really pays?

Tariff costs passed on to consumers through price increases are likely to ultimately push up inflation and can lower demand. Higher inflation coupled with slowed consumption alongside lower corporate confidence may slow economic growth. Reduced demand and squeezed profit margins for companies may lead to higher unemployment.

When we consider tariffs, trade flows across both countries and industries vary. The chart below shows trade balances for some of the US’s biggest trade partners.

Tariffs have the potential to impact a range of countries and sectors across economies. For example, the US primarily imports machinery and transport equipment, and exports commodities, however it’s trade relationship with Canada is the opposite.

Over the last century tariffs have come down in the US; however, 2025 has marked higher tariffs for some countries and industries. This has led to uncertainty in markets.

Following the announcement of proposed tariff increases by the US in April of 2025, global stock markets saw daily cumulative returns of -11.6%, however the following day where some tariffs were pared back the market rebounded by 5.7%.¹ This volatility has the potential to impact portfolios and inject uncertainty into the broader market.