Walk into any local big-box retailer right now and look at the price tags. If you feel like they've been creeping up—or jumping up—you aren't imagining it. There is a lot of noise out there about trade wars and "making other countries pay," but if you look at the actual plumbing of how international trade works, the reality is a bit more painful for the average person.
Honestly, the biggest misconception about trade policy is that the exporting country sends a check to the government. They don't. When a 25% tariff is slapped on a shipment of steel or a container of sneakers, the foreign government isn't the one paying.
So, who pays tariffs on imports? In the most literal sense, it's the importer of record. That’s almost always a domestic company. If a US-based bike shop orders 500 frames from a factory in Vietnam, and there’s a new tariff on those frames, that shop (or the distributor they buy from) has to pay the tax to U.S. Customs and Border Protection (CBP) before those frames ever leave the port.
The money goes straight into the U.S. Treasury. It’s a domestic tax on an international transaction.
The Shell Game: Why You Feel the Pinch
You might think, "Okay, so the business pays it. Why should I care?" Because businesses aren't charities. They have three ways to handle a sudden 10% or 25% spike in their costs, and none of them are particularly fun for you.
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- They pass it on to you. This is the most common path. If the cost of importing a laptop goes up by $50 because of a tariff, the retail price usually goes up by at least $50. Sometimes it goes up more because the retailer wants to maintain their percentage profit margin.
- They eat the cost. This happens when competition is so fierce that a store is terrified of losing customers. They take a hit on their profits. But this can only last so long before they start cutting staff or reducing the quality of what they sell.
- They squeeze the supplier. A massive company like Walmart might tell a foreign factory, "We aren't paying more. You need to lower your price to cover the tariff." Sometimes the factory agrees just to keep the contract, but often they can't afford to, or they simply find a buyer in Europe or Asia instead.
Research from the National Bureau of Economic Research (NBER) and recent data from The Budget Lab at Yale suggest that in the vast majority of cases, nearly 100% of the tariff cost is eventually borne by domestic businesses and consumers. By June 2025, estimates showed that up to 80% of new tariff costs were already appearing in the prices of core goods like electronics and home appliances.
The "Invisible" Tariff in Domestic Goods
Here is where it gets kinda tricky. You might buy something that says "Made in the USA" and think you're safe from the tariff drama. You aren't.
Modern manufacturing is basically a giant, global Lego set. An American-made truck might use Canadian aluminum, Mexican wiring harnesses, and Chinese sensors. If there is a 25% tariff on the steel or the aluminum, the American factory has to pay more for its raw materials.
To keep their doors open, they have to raise the price of the "American-made" truck. This is why economists like Mary Amiti from the Federal Reserve Bank of New York have pointed out that tariffs on "inputs" (parts used to make other things) often hurt domestic manufacturers just as much as they help them.
Contracts and the "DDP" Trap
Whether a company pays the tariff the moment the ship docks depends on a tiny bit of legal jargon in their contract called Incoterms.
Most shipments are sent FOB (Free on Board) or CIF (Cost, Insurance, and Freight). Under these terms, the buyer—the American company—is responsible for everything the second the goods are on the ship or arrive at the port. They are the ones who get the bill from the customs broker.
There is one exception: DDP (Delivered Duty Paid). In a DDP contract, the seller (the foreign factory) agrees to handle all the taxes and duties. If you've ever ordered something from a foreign website and it just showed up at your door with no extra fees, that was likely DDP. But even then, you can bet the seller factored the cost of that potential tariff into the price they charged you at checkout.
What happened in 2025?
Looking back at the data from the first half of 2025, the average effective tariff rate in the U.S. jumped to its highest level since the early 1900s—hitting roughly 22%.
According to the Penn Wharton Budget Model, this wasn't just a "business problem." A middle-income household faced an average loss of thousands of dollars in purchasing power. It wasn't one big bill; it was a "death by a thousand cuts"—$2 more for a gallon of paint, $15 more for a pair of jeans, and $600 more for a refrigerator.
Real-World Examples: The Winners and Losers
It’s easy to get lost in the numbers, so let's look at what actually happens on the ground.
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- Retailers: Companies like Target or Best Buy often have "forward contracts." This means they've already locked in prices months in advance. When a new tariff is announced, they might not raise prices immediately. But once they need to restock, those new, higher costs hit their shelves.
- The "De Minimis" Loophole: For a long time, shipments worth less than $800 could enter the U.S. without paying duties. This is why certain fast-fashion apps were so cheap. However, as of late 2025, the government has been cracking down on this, requiring more formal entries and payments even for smaller shipments.
- Small Businesses: These are usually the ones that get hit the hardest. A small coffee roaster importing beans from Brazil or a boutique clothing brand using Italian silk doesn't have the leverage to tell their suppliers to lower prices. They have to pay the tariff up front, which can wreck their cash flow.
Is anyone actually "winning"?
The goal of a tariff is usually to protect a specific domestic industry. If there’s a high tariff on foreign steel, then American steel mills can theoretically sell more steel.
The trade-off is that every other American company that uses steel—from soup canners to bridge builders—now has higher costs. It’s a classic case of helping a concentrated group of people while spreading the cost across the entire population.
Some companies also try to "tariff-hop" by moving their factories from a high-tariff country like China to a lower-tariff one like Vietnam or Mexico. But this takes years and costs millions of dollars. In the meantime, the importer (and you) keeps paying the tax.
Actionable Insights for Your Wallet
If you're worried about how trade policy is going to affect your budget, there are a few practical moves you can make:
- Front-run the price hikes. If a major tariff on consumer electronics or apparel is announced but doesn't take effect for 30 or 60 days, that is usually the best time to buy. Retailers are often selling through "old" inventory that was imported before the tax.
- Check the "Country of Origin." It’s not always easy, but knowing where your high-ticket items are coming from can help you predict price volatility. Goods from countries with free trade agreements (like those under USMCA) often avoid the steepest hikes.
- Look for domestic substitutes. While domestic prices often rise alongside imported ones, sometimes the gap closes enough that the "Made in USA" option becomes a better value.
- Watch the "importer of record" status. If you are a business owner, review your Incoterms. Moving from FOB to DDP might seem like it saves you the headache of customs, but it often just hides the cost in a higher "landed price" from your supplier.
Ultimately, tariffs are a tool of foreign policy, but the bill is paid in local currency by the people living right here. Understanding that the "check" comes out of the importer's bank account—and eventually your own—is the first step in navigating a high-tariff economy.