What Is a Tariff?
Tariffs are a type of excise tax that is levied on goods produced abroad at the time they are imported. Unlike domestic sales and use taxes, consumers indirectly pay excise taxes through higher prices but may not see the tax specifically reflected as a separate line item on their receipts. The intention behind tariffs is to promote the consumption of goods manufactured domestically by discouraging the consumption of goods manufactured abroad, as foreign goods likely will be priced higher because of the tariffs. While tariffs provide some protection to domestic industries, this is done at the expense of others in the economy, such as consumers and corporations.
Pros and Cons of Tariffs
Governments impose tariffs to generate a variety of benefits to their economies, including the following items.
Increased Government Revenue.
Because a tariff represents a tax on imports, it generates revenue for governments. For example, a 20% tariff imposed on the projected 2025 imports of $4.3 trillion would theoretically result in $860 billion in incremental tax revenue. Of course, this calculation assumes the 20% tariff is applied across all imports, and the volume of imports remains unchanged once tariffs have been imposed. Because tariffs are generally intended to reduce domestic consumption of foreign goods, a more complex analysis of projected revenues is normally required.
Higher Domestic Job Creation and Investment.
Because tariffs promote the consumption of goods manufactured domestically, they may enable the return of jobs in certain sectors and encourage domestic investment. But there is no guarantee this won’t result in increased domestic automation rather than increased human employment. For example, Boston Dynamics, a manufacturer of robotics solutions, announced that Hyundai Motor would invest $21 billion in the United States to purchase tens of thousands of robots to enhance its manufacturing capabilities and drive innovation (https://tinyurl.com/2h5d3uup).
Strategic Autonomy and Infant Industries.
In certain industries, such as defense-related industries, ensuring domestic production is critical. The United States already sources most of its defense procurement domestically, but key areas like semiconductors and artificial intelligence (AI) may justify protectionist policies. For materials or goods that cannot be produced domestically, however, such as rare earth minerals and batteries, tariffs could be counterproductive as they would simply result in higher costs. For those elements where domestic production is not available, seeking a diversified supplier base, expanding stockpiles for crisis scenarios, and investing in research and development (R&D) to create substitutes might be more effective practices than setting tariffs.
Emerging industries may also need some protection from foreign competition. This assertion is supported by the “infant industry” argument, which states that startups or companies in the early stages may not be able to compete with more established foreign competitors. Tariffs could be imposed under such circumstances to shield these domestic companies and allow them to grow and become more competitive as they gain proficiency and achieve economies of scale.
The downside is that research shows “protected” industries tend to become inefficient, technology-dependent, and stagnant. This situation can be illustrated by the automative industry, where an electric SUV is being sold in China for as low as $15,000, but the closest equivalent in the United States is sold starting at $40,000. The price difference is not only huge, but even low-end models come with advanced features in China (Peter Landers, “What a $15,000 Electric SUV Says About US-China Car Rivalry,” Wall Street Journal, May 2025, https://tinyurl.com/2s42azmy).
Support to Friendly Nations.
Often, governments prefer to disrupt supply chains from adversarial or rival nations (e.g., China) by forcing the shift of operations from multinational corporations to friendly or neutral countries (e.g., Mexico, Vietnam, India). Such actions are intended to create a geopolitical advantage. The reality is often quite different, as global supply chains are heavily dependent on dynamic interactions and geographic and organizational features of manufacturers and suppliers. As a result, companies can employ a variety of strategies to mitigate the impact of trade restrictions. For example, companies can opt to move production to other countries that are not affected by the restriction or can sell their products in alternative countries (G. Gereffi, H.C. Lim, and J. Lee, “Trade Policies, Firm Strategies, and Adaptive Reconfigurations of Global Value Chains,” Journal of International Business Policy, vol. 4, pp.506–522, 2021, https://doi.org/10.1057/s42214-021-00102-z).
Commitment to One’s Country.
In some cases, the consumption of goods manufactured domestically will not only be driven by higher prices on imported goods but also people’s devotion and loyalty to their country. This feeling of nationalism may support tariffs symbolically, even if the economic benefits are not significant.
Despite the claimed benefits behind tariffs, there are significant costs we need to be aware of, such as:
Trade War.
Imposing tariffs may result in reciprocal or retaliatory tariffs from trading partners. Consequently, jobs in the export industry can be impacted in both countries, and ultimately, a trade war and recession may result. A trade war embodies an intense international conflict where nations interact, bargain, and retaliate primarily over economic objectives directly related to the traded goods or service sectors of their economies, and where the means used are restrictions on the free flow of goods or services. Economists often cite the Smoot-Hawley Act, which was enacted in 1930, as evidence that trade wars reduce exports and exacerbate recessions (Kris James Mitchener, Kirsten Wandschneider, and Kevin Hjortshøj O’Rourke, “The Smoot-Hawley Trade War,” National Bureau of Economic Research, https://tinyurl.com/2uepezw7).
Inflation and Consumer Costs.
Because tariffs are a tax that raises the cost of both finished goods and intermediate components, companies typically pass the higher costs to consumers, leading to inflation. For example, Walmart has announced that prices would increase in response to tariffs. The retailer, whose customer base is 90% American, referred to the price of bananas, which increased from $.50 to $.54, or 8% higher. Indications are that other retailers will follow (Sarah Nassauer, “Walmart Becomes Biggest Retailer Yet to Pass Through Tariff Price Increases,” Wall Street Journal, May 2025, https://tinyurl.com/4v6x242d). A CNBC analysis revealed Walmart prices increased as much as 51% following tariff announcements (Melissa Repko, “Here’s where Walmart Prices Are Changing — and Staying the Same — as Trump’s Tariffs Hit,” CNBC, July 2025, https://www.cnbc.com/2025/07/17/trump-tariffs-affect-walmart-prices.html).
Restriction to Competitiveness.
As mentioned above, domestic industries that have been protected from foreign competition may become inefficient. These industries may become dependent on tariff protection, which then discourages innovation, leading to high prices and poorer quality.
Foreign Policy Setbacks with Minimal Impact on Targeted Nations.
Tariffs impact relations with allies and trading partners; as a result, countries like the EU, Mexico, and Canada, which rely heavily on the US market, may seek to diversify trade with other countries or even retaliate, undermining cooperation on global issues. Furthermore, China’s reliance on US exports is declining, while its exports to other regions are rising. According to Statista, the United States accounted for approximately 14.7% of Chinese exports in 2024, the lowest level in the last decade. Therefore, tariffs have a limited effect on Chinese economic policy (https://www.statista.com/statistics/1609793/china-us-share-in-exports).
Mitigating the Impact of Tariffs
As tariffs take effect and impact the dynamics of global trade, several strategies are available for corporations to adapt and mitigate their impact.
Inventory Optimization.
Companies can anticipate tariff increases by importing and stockpiling goods before they take effect. But doing so will increase carrying costs and contradict lean manufacturing principles. Reports show that Apple built iPhone inventory ahead of the tariff announcement by air shipping 57.9 million iPhones in the first quarter of 2025 (Rolfe Winkler, “Apple Built iPhone Inventory Ahead of Tariff War, Data Show,” Wall Street Journal, Apr. 14, 2025, https://tinyurl.com/2z6f858y). Such strategies cannot work for that long. Reports also indicate analysts expect Apple to increase prices eventually, citing $900 million higher costs as the result of the tariffs (Dan Gallagher, “Apple Won’t Be Able to Avoid Tariff-Related iPhone Price Increases for Long,” Wall Street Journal, May 2025, https://tinyurl.com/3jttcnah).
Supplier Diversification.
Corporations often attempt to diversify geographically to address concentration risk. This strategy can also be used to avoid country-specific tariffs. This mitigation strategy is easier said than done. Setting up new supply chains is costly, time-consuming, and fraught with logistical and organizational challenges. The efficiency and scale of Chinese supply ecosystems remain difficult to replicate. Reports indicate that manufacturers have been trying to replace China with Vietnam, but they are running into difficulties, including the lack of specialized infrastructure and labor shortages. As a result, some countries have no choice but to relocate their production lines to Southeast Asian countries or elsewhere, while continuing to manufacture in China, a strategy known as “China+1” (Niharika Mandhana, “Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible,” Wall Street Journal, August 2019, https://tinyurl.com/bdwchn7m).
Passing Tariff Costs to Consumers.
Ultimately, tariffs represent higher costs, which corporations generally pass on to their consumers, depending on the demand elasticity and the profitability of their products. Most research indicates that tariffs are largely passed through to consumers, though the degree varies by product and sector. Reports show companies making announcements to raise prices publicly due to tariffs increasing (Zoe Mailn, “16 Brands Raising Prices Due To Tariffs,” NBC Select, August 2025, https://tinyurl.com/mr3zzmmw).
Strengthening Supplier Relationships.
Corporations can mitigate the impact of tariffs by asking their suppliers for price reductions. While this may backfire, as product quality may suffer, it may work out in some cases, as Walmart found out after asking its suppliers to lower their prices (Taylor Herzlich, “Walmart Asks Chinese Suppliers to Slash Prices as it Faces Trump Tariffs,” New York Post, Mar. 6, 2025, https://tinyurl.com/y8y-mu36f). In addition, companies could improve their cost structure by adopting digital technologies, such as the Internet of Things (IoT), data analytics, and artificial intelligence (AI), as well as having better coordination and sharing information with their suppliers. Blockchain technologies have also been found effective in the management of waste and product returns (Miying Yang, Mingtao Fu, and Zihan Zhang, “The Adoption Of Digital Technologies in Supply Chains: Drivers, Process and Impact,” Technology Forecasting and Social Change, vol. 169, Aug. 2021, https://doi.org/10.1016/j.techfore.2021.120795).
Lobbying for Tariff Exemptions.
Research shows that companies may use political contributions to obtain tariff exemptions. A tariff exemption is more likely to be granted if such a tariff would cause harm to American interests or if no substitute products are available. A study found that contributions to Republican candidates, particularly influential ones, increase the chance of obtaining an exemption, while contributions to Democratic candidates reduce it. The study also found that the use of lobbyists with ties to the Trump administration is also more likely to obtain tariff exemptions (Veljko Fotak, Hye Seung (Grace) Lee, William L. Megginson, and Jesus M. Salas, “The Political Economy of Tariff Exemption Grants,” Journal of Financial and Quantitative Analysis, Jan. 2025, https://doi.org/10.1017/S0022109024000437).
Contributions to Republican candidates, particularly influential ones, increase the chance of obtaining an exemption … and use of lobbyists with ties to the Trump administration is also more likely to obtain tariff exemptions.
Process and Product Innovation.
As noted above, tariffs can encourage companies to invest in automation and robotics. Some companies go even further, engaging in a practice known as “tariff engineering,” which involves altering a product’s design or materials to fall into a different tariff category with lower import duties (Mark Dodds and Kevin Heisey, “Riddell vs. United States Casts Legal Light on Tariff Engineering,” Dec. 1, 2014, Sport Marketing Quarterly, https://tinyurl.com/2mc9tdhr). For example, Converse once added a thin felt lining on the sole of their sneakers to be successfully classified as slippers, which have lower import costs. Nevertheless, high upfront costs, uncertainty about tariff permanence, and labor shortages in high-tech manufacturing limit the feasibility of these strategies.
Transshipment and Re-routing.
Some companies legally circumvent tariffs using a tactic known as transshipment, which consists of rerouting goods through third countries where they add sufficient local value to change the product’s country of origin. While controversial, this practice is increasingly common and illustrates the complexity of enforcing tariffs. Transshipment data is excluded from trade statistics. But one study found that 70% of US imports are transshipped through an intermediate country, with this share being stable over the last ten years (Anh Do, Woan Foong Wong, Sharat Ganapati, and Oren Ziv, “Transshipment Hubs, Trade, and Supply Chains,” working paper, September 2024, https://tinyurl.com/97xf9pfp). This practice, if used to evade tariffs, comes with huge risks, including penalties, which can range from 10% to 100% of the product value, product confiscation, and damage to the company’s reputation.
Be Prepared
Tariffs, while perhaps politically attractive, are economically inefficient. In general, their costs far outweigh their benefits. They harm consumers, disrupt global value chains, and undermine multilateral, multinational cooperation. Moreover, they often fail to achieve their primary goal of job creation. In the current environment, corporations must be ready to address large and unpredictable tariffs as they become some sort of barrier in international trade. While numerous mitigation strategies exist, they come with significant trade-offs and costs. Businesses must weigh the incremental benefits of each adaptation against its risks and financial implications.
In the author’s opinion, the best economic path forward lies in fostering competitiveness through innovation, not protectionism. In specifically tailored cases where tariffs promote innovation, they may be helpful. Unfortunately, most economists predict that the current spare tariffs will simply increase costs to American consumers. A strategic trade policy should focus narrowly on defense and critical technology sectors, while promoting openness, collaboration, and adaptability across global markets.
