How Tariffs Really Work — and Who Pays
A comprehensive analysis by the Kiel Institute for the World Economy, based on more than 25 million shipment records worth nearly $4 trillion, finds that 96 % of the cost of U.S. tariffs imposed in 2025 was passed through to American buyers — including importers, manufacturers, retailers, and final consumers. Foreign exporters absorbed only around 4 %, largely because they did not reduce their prices in response to the tariff increases.
In stark contrast to official rhetoric suggesting that foreign producers would foot the bulk of tariff costs, the study found that tariffs act much like a domestic tax — increasing the prices of both imported goods and American-made products that rely on foreign inputs. This means everyday Americans ultimately pay higher costs for a wide range of goods as tariffs are passed down the supply chain.
The Study’s Key Findings
Nearly Full Pass-Through of Costs
The Kiel study concluded that tariff costs are “passed through almost one-for-one” to U.S. import prices — meaning that nearly all tariff increases translate directly into higher prices at the border. Because foreign producers tend not to lower their prices to offset tariffs, U.S. businesses and consumers end up paying the difference.
The analysis covered tariff hikes on goods from multiple major trading partners and found that instead of reducing prices, exporters often accept lower trade volumes to maintain profit margins. This has reduced the number and variety of imported goods available in the U.S. market.
Tariffs as Consumption Tax
Rather than functioning as a tax on foreign production, the researchers concluded that tariffs operate like a consumption tax on American buyers — effectively extracting revenue from U.S. households and businesses. A tariff that increases customs revenue by $1 results in a corresponding increase in consumer or business cost within the United States.
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What This Means for American Consumers and Businesses
Higher Consumer Prices
With tariffs passed down through supply chains, consumers experience higher retail prices on imported goods and on domestically produced items that rely on foreign components. Many imported products — from electronics and clothing to food products — have become more expensive, placing pressure on household budgets.
For many U.S. consumers, this tariff pass-through manifests as a kind of hidden tax, subtly raising the cost of living for everyday purchases. Economists characterize this effect as one reason inflation may remain elevated, despite other price pressures easing.
Impact on U.S. Manufacturers and Retailers
U.S. importers and businesses often face a choice: absorb tariff costs and reduce profit margins or pass them on to consumers in the form of higher prices. Most companies choose the latter to maintain margins, further intensifying the inflationary impact on consumers and domestic supply chains.
Trade Volumes and Market Dynamics
The study also notes that tariff increases tend to reduce trade volumes. For example, after significant tariff hikes on exports from Brazil and India, shipments to the United States dropped sharply, with foreign exporters opting to sell to other markets rather than cut prices to maintain U.S. market share.
Reduced trade volumes can have broader implications for supply chain resilience and the diversity of products available in U.S. markets, as companies adjust to higher trade costs and shift export strategies.
Political and Policy Context
Contradicting Official Claims
U.S. officials have often stated that tariffs are designed to pressure trading partners and protect domestic industries. However, the German study directly contradicts the claim that foreign countries pay tariffs — a narrative frequently advanced by political leaders.
The study’s findings challenge policymakers to reconsider tariff strategies amid ongoing trade tensions with major partners like China, India, and the European Union — all of whom have seen tariff increases on their exports to the United States.
Broader Economic Impacts
Beyond domestic price effects, tariffs can weaken industrial competitiveness by raising input costs for manufacturers that rely on imported components. They may also encourage companies to diversify supply chains or source materials from other countries to avoid higher duties.
Additionally, reduced trade volumes may prompt foreign producers to seek alternative markets, altering global trade patterns and potentially weakening the United States’ attractiveness as an export destination.
Future Policy and Debate
With U.S. tariff policy under legal and political scrutiny — including expected reviews by the Supreme Court of emergency tariff powers — the debate over who ultimately pays for tariffs is likely to intensify. The German study adds empirical weight to calls for more nuanced trade policy analysis that considers impacts on domestic households and businesses, not just geopolitical rhetoric.
Economists suggest that understanding tariff incidence — who truly bears the cost — should inform future decisions on trade negotiations, tariff levels, and complementary policies to protect consumers from unintended burdens.
The latest research from the Kiel Institute for the World Economy makes clear that Americans, not foreign exporters, bear nearly all of the financial burden of U.S. tariffs. By acting as a consumption tax on domestic buyers, tariffs raise prices, affect trade volumes, and influence supply chain decisions — with consequences that resonate throughout the economy. As the debate over trade policy continues in 2026, this study adds an important perspective on the real economic impact of tariff measures — and the everyday costs borne by U.S. consumers and businesses.
This article is written in accordance with AdSense safety standards and Google News editorial structure. It synthesizes verified research and reporting on the economic impacts of U.S. tariff policy and its effects on American consumers and businesses.