Filenews 30 August 2025
One of the reassuring things about the laws of physics is that they are immutable. They create a stable, predictable physical world. The laws of economics, however, are not always so reliable. Take tariffs, for example. On April 2, President Donald Trump announced the most draconian tariff package the U.S. has seen in decades. World leaders panicked, markets collapsed, and economists of all stripes took to the airwaves, warning that we would see dramatically higher prices.
Most of the tariffs announced on "Liberation Day" remain up in the air, although the average tariff on goods entering the U.S. has exceeded 13 percent, according to Bloomberg Economics. But so far the impact has been difficult to perceive. Corporate earnings, in general, remained strong, market enthusiasm was maintained, and monthly inflation reports were fairly subdued. Then... Where did the tariffs go?
"There are essentially three parties that can end up shouldering the cost of tariffs," says economist Alberto Cavallo, head of the Pricing Lab at Harvard Business School. "It could be foreign exporters, U.S. companies bringing these goods to the U.S., or U.S. consumers."
Foreign companies
The government has long argued that, while U.S. businesses importing goods may be the ones paying the import tax, the foreign company at the other end of the transaction will foot the bill. The idea is that exporters will agree to lower prices in order to help U.S. companies offset the tariffs. As strange as this sounds, it is not such an absurd matter. U.S. buyers make up nearly 70 percent of the U.S. economy and 15 percent of the global economy. For Canada, China, Colombia, Germany, Japan, Mexico, and many others, the U.S. is the top buyer. The threat of cutting off from their larger customer base unless they lower prices seems in the end like an offer that many countries could not refuse.
Obviously, however, most have already refused. If this coercion worked, the Import Price Index would fall. But so far the index has been gradually increasing. Interestingly, much the same thing happened in Trump's first round of tariffs in 2017: Import prices remained largely the same. Foreign companies do not pay for the duties. So who pays?
American Companies
U.S. companies are the ones who pay the money to pay the tariffs at ports and airports across the country. This leaves companies with few options: They can absorb these costs and just accept lower profits, or they can pass on the tariffs to us. So far, neither has happened to a significant extent. What is happening?
Chad Bown, an economist at the Peterson Institute for International Economics, studies tariffs. He believes that we are in a transitional stage. The reason: Many companies have not really paid the "Liberation Day" tariffs yet, because they started making mass imports in panic, long before April 2.
Bown says U.S. businesses now have stocks they can reduce. This means that they can delay the increase in prices and their profits will not suffer losses. But eventually stocks will run out and companies will find themselves between a hit to their profits and a rise in prices.
We
At some point, though, companies will almost certainly pass the costs on to their customers. The data shows that prices have already started to rise (by an average of 3%) in response to Trump's tariffs. "These increases came largely from goods from China," says Paola Llama, a researcher at Northwestern University's Kellogg School of Management. "We see this particularly in categories such as household goods, furniture and electronics."
But prices don't always tell the whole story. Inflation has the ability to transform. The tariffs can appear as fewer socks on the package, more air in the bag of chips, an extra charge for almond milk in your Americano coffee, weaker thread on your shirt buttons. Shrinking inflation, inflation hitting quality, hidden charges, abolishing bids: these are some of the ways in which companies can pass on the cost of tariffs to their customers.
The Goods That Disappear
There is another way in which tariffs can manifest themselves in an economy, although it is much harder to see. "Sometimes goods just disappear," says economist Bown. Tariffs can make it unprofitable for companies to import goods, so they often just stop. This means less variety in the store. After Trump's first round of tariffs in 2017, imports from China fell by about 10 percent over the next two years.
It is difficult to know which species will be affected. Trump's 50 percent tariffs on steel and aluminium will affect products across the economy: toys, electronics, cars, household items, and even garden chairs.
