The global trade order has been plunged into crisis with the introduction by the US of sweeping import tariffs, with August the effective date of implementation in most cases.
These measures, which have been applied to more than 60 countries, involve a base tariff of 10% with increments added to it depending on the US’s unilateral and unconventional determination of reciprocity, which seems to be based more on trade deficits and other such factors than the extent of US exporters’ access to those markets.
If these measures indeed revolve around market access, the narrative about them would presumably include more discussion of market access issues, and the actions taken could have been in terms of established World Trade Organisation rules on reciprocity. Instead there is an overemphasis — at least from the US — on the revenue benefits of the tariffs, with President Donald Trump implying that foreign countries would pay the tariff and even suggesting that the tariff could replace the federal tax. This is clearly not true. On the other hand, financial market experts such as Nassim Nicholas Taleb, who claim that US consumers alone will bear the brunt of the tariffs, are equally incorrect.
'Who pays?' is not a simplistic case of 'who is being tariffed?' but a quantitative outcome determined by relative price elasticities of demand and supply.
A tariff is simply a tax, in this case on imports, charged at the border when imported goods enter the tariff-imposing country. The answer to “who pays the tariff?” gets complicated though. In economic theory, the conceptual container for trade theory, the answer to this question is found in the theory of “the incidence of the tariff”. Economists emphasise that “knowing who writes the cheque tells you exactly nothing about who bears the burden of a tax”. The economic burden, or incidence, refers to the reduction in real income or welfare experienced by either producers or consumers due to the tariff.
In this case tariff incidence is the analysis of how the burden of an import tax is distributed between foreign producers (exporters) and the domestic consumers (importers/buyers) of the product. It determines whether the price paid by consumers increases, or the price received by producers decreases, or some combination of the two. The key determinant of this distribution is the economic concept of price elasticity, which measures the responsiveness of quantity demanded or quantity supplied to a change in price.
If demand for the imported product is inelastic (meaning consumers continue purchasing similar quantities despite higher prices), domestic buyers absorb a larger share of the tariff through elevated prices. However, if supply is inelastic (foreign producers are less able to reduce output or redirect sales elsewhere, for example), exporters bear more of the burden by accepting lower net revenues. When both elasticities are considered, the incidence falls disproportionately on the party with the less elastic response; in competitive markets, the side with less ability to adjust quantities or prices absorbs more of the tariff impact.
The incidence of the tariff accepts that the importer writes the cheque to the customs & excise authority. However, the landed (pretariff) price of the imported good may or may not have been reduced substantially. If the foreign exporters drop prices to offset the tariff, they are in effect paying the tariff. If not, and the tariffed price is increased by the tariff or close to the tariff, the domestic consumer pays the tariff. A third outcome is that the importing business keeps the posttariff price close to the pretariff price but reduces their margin by the tariff rate or close to it. In this case the importer actually pays the tariff.
There are a range of intermediate options between these three extremes, which are dictated by the relative elasticities. In markets where alternatives are scarce, consumers may pay most of the tariff, while in competitive global markets producers might lower their prices to maintain market share. And so we observe that tariffs do not simply transfer wealth from foreign entities to the domestic government but redistribute costs across economic agents in complex ways.
Many lessons from recent and more distant economic history offer insights into tariff incidence. Studies on recent US tariffs, particularly those imposed during the US-China trade war (2018-19), consistently indicate that most of the economic burden by far was borne by US firms and, ultimately, US consumers. Researchers found nearly complete pass-through of these tariffs to import prices, meaning the higher tax was reflected in higher prices paid by American buyers.
What of the current situation with the wide-ranging tariffs being introduced by the US? A recent Goldman Sachs report indicates that US businesses absorbed about 64% of the tariff costs up to the middle of the year, foreign exporters absorbed 14%, and US consumers bore just 22%. However, this distribution is shifting; by October consumers are likely to be shouldering up to 67% of the burden, while businesses and exporters are expected to bear 8% and 25%, respectively.
This contrast between the initial and eventual expected impact on consumers can be explained by several factors. During the US-China trade war in 2018-19 firms were reluctant to be the first to raise prices for fear of losing customers, or they used stockpiles built up before tariffs took effect, or temporarily absorbed costs to maintain market share. A similar situation is currently playing out with the latest US tariffs, leading to a false narrative by tariff-imposing authorities that the burden of tariffs will not ultimately fall on US consumers.
Tariffs are blunt instruments. They may deliver targeted gains to specific upstream sectors or raise revenue, but they also raise prices for downstream firms and households, distort resource allocation and could provoke retaliation that imposes costs on the exporters of the original tariffing country. “Who pays?” is not a simplistic case of “who is being tariffed?” but a quantitative outcome determined by relative price elasticities of demand and supply.
There is much evidence from recent experience showing substantial pass-through to domestic buyers in many settings, including the US and several African markets. Tariffs therefore hurt all parties in aggregate — albeit in different ways — and the distribution of wins and losses is certainly more nuanced than news headlines or one-line tweets would suggest.
• Stuart is an economist and associate of the Trade Law Centre.
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