‘What are the economic effects of tariffs for consumers, businesses and global economies?
- Amber Sarwar
- 5 days ago
- 4 min read
Understanding Tariffs
A tariff is a tax on goods crossing national borders which can be imposed to protect domestic industries, raise government revenue, punish unfair trade partners, or encourage local productions. However, tariffs carry far-reaching consequences for all involved.
How tariffs affect consumers
Higher Prices:
The most direct effect of tariffs is that they raise import costs, which businesses usually pass
on to consumers (USITC 2021). During the 2018-2019 U.S.-China trade war, tariffs pushed
up prices on electronics, appliances, and clothing by 3-4% (Bown & Kolb 2025). Price hikes
are not instant as firms often absorb costs at first, but within six months about 90% of tariff
costs reach consumers (Amiti et al. 2019; Federal Reserve 2019).
Reduced Choices:
Tariffs can also limit product variety. If imports become too expensive, firms may exit the
market, leaving consumers with costlier or lower-quality substitutes. The Congressional
Research Service (2021) found tariffs reduce competition and limit choice for consumers. A
historical case is 1930s Germany, where Hitler’s autarky policies restricted imports, forcing
ersatz substitutes for goods such as rubber and coffee. Prices rose, quality fell, and living
standards declined.
Inflation Risk:
Widespread tariffs can contribute to broader inflation. When businesses face higher costs for
imported materials, they often raise prices across the board (Fajgelbaum et al. 2019). The
Federal Reserve Bank of New York estimates that tariffs added 0.2% to overall inflation –
small but significant for household budgets (Amiti et al. 2019).
How tariffs affect businesses
Protection for Domestic Industries:
Tariffs shield local firms by raising import costs to disadvantage foreign competitors. U.S.
steel tariffs in 2018, for example, made imports 25% pricier and lifted domestic output by 4%
(Bown 2025). But such gains often fade as productivity in the sector actually fell by 2%
(Flaaen & Pierce 2019). Protection can dull incentives to innovate and improve efficiency
with the lack of competition.
Higher Costs for Import-Dependent Businesses:
Not all businesses are able to benefit from protectionist policies. Businesses reliant on
imports suffer instead. Carmakers using foreign steel faced higher costs and shrinking
margins. Tire tariffs offer a cautionary tale in this regard as each U.S. tire job saved, cost
about sixteen in downstream industries (Hufbauer & Lowry 2012).
Retaliation and Trade Wars:
When one country imposes tariffs, others often retaliate. The U.S.-China trade war led to
billions lost in revenue for American farmers as China targeted agricultural goods (Chandra
& Long 2013). Such trade wars disrupt global supply chains and hurt businesses on both
sides.
The soybean market provides a stand-out example. U.S. soybean exports to China plummeted from $12bn in 2017 to just $3bn in 2018 after retaliatory tariffs. While Brazil benefited by increasing its soybean exports, many American farmers went bankrupt or needed government bailouts.
How tariffs affect the global economy
Disrupted supply chains:
Modern manufacturing relies on global supply chains, and tariffs make cross-border trade
more expensive. IMF research (2021) estimates that recent trade tensions reduced global
GDP growth by nearly 0.8%, as companies struggled with higher costs and delays.
Slower economic growth:
When trade declines due to tariffs, export-driven economies suffer. Germany and China, for
example, saw slower growth during the 2018-2019 trade conflicts. Prolonged trade wars can
even trigger recessions in vulnerable countries.
Shifts in trade relationships:
Tariffs force businesses to find new suppliers, U.S. companies shifted some imports from
China to Vietnam and Mexico after 2018 (Freund et al. 2023). While this benefits some
nations, it also creates uncertainty in global markets (Evenett & Fritz 2021).
The Hidden Costs of Tariffs
Beyond the direct economic impacts, tariffs can create several less visible problems:
1. Administrative Burdens: Companies spend millions complying with complex tariff rules
2. Investment Uncertainty: Businesses delay expansion plans due to unpredictable trade policies
3. Legal Costs: Frequent disputes lead to expensive trade litigation
4. Resource Misallocation: Capital flows to protected sectors instead of more
productive uses
A World Bank study (2023) found these hidden costs can equal 30-50% of the direct tariff
impacts, making them far more expensive than most policymakers anticipate.
Are Tariffs Worth the Cost?
Evidence suggests that tariffs are a mixed bag. They can protect certain industries but often
lead to higher prices, fewer choices, and economic instability. While helpful in the short term, long-term effects like trade wars and supply disruptions usually outweigh the benefits (Fajgelbaum et al. 2019).
Ultimately, tariffs represent a trade-off between protecting specific industries and maintaining overall economic efficiency. As the global economy becomes more interconnected, policymakers face growing challenges in balancing these competing priorities. Alternative approaches like targeted subsidies or worker retraining programs may sometimes achieve similar goals with fewer negative consequences.
For consumers, tariffs mean higher costs. For businesses, they create winners and losers,
those who can profit from protectionist policies and those who lose out on profit because of
them. And for the global economy, they slow growth and increase uncertainty. Understanding these impacts helps explain why trade policies remain so controversial, especially tariffs.
Amber Sarwar is a student at Aquinas College, and one of the five Young Economist of the Year 2025 finalists.
Bibliography
USTIC 2021 - https://www.usitc.gov/publications/332/pub5349.pdf
Bown & Kolb 2025 -
Federal Reserve 2019 - https://www.federalreserve.gov/econres/feds/files/2019086pap.pdf
Fajgelbaum et al. 2019 - https://www.nber.org/papers/w25638
Amiti et al. 2019 - https://www.nber.org/system/files/working_papers/w25672/w25672.pdf
Bown 2025 -
Hufbauer & Lowry 2012 - https://ideas.repec.org/p/iie/pbrief/pb12-9.html
Chandra & Long 2013 - https://ideas.repec.org/a/eee/wdevel/v51y2013icp169-186.html
IMF Research 2021 -
Freund et al. 2023 -
Evenett & Fritz - https://globaltradealert.org/reports/144
