Cutting Through the Confusion about How Import Taxes Really Work
Tariffs may seem like an issue for large companies or foreign governments, but they directly affect everyday prices and small business operations here in the United States. You’ve likely heard phrases like “the U.S. is raising tariffs on China,” which might sound like a tax being imposed on another country. In reality, tariffs are paid by importers, and most of them are U.S.-based businesses, small and large. Understanding how tariffs work in the U.S. for small businesses is essential to seeing the full picture behind rising costs and supply chain challenges.
Let’s break it down clearly.
What Is a Tariff?
A tariff is a tax placed on goods that are brought into a country from abroad. When a business in the United States buys products from another country and imports them, it must pay a tariff. Tariffs are typically charged as a percentage of the price the buyer pays to the foreign seller. In the U.S., these tariffs are collected by Customs and Border Protection at ports of entry across the country. The funds go directly to the U.S. Treasury, just like other taxes such as payroll or income taxes.
Despite how it’s often described, the country exporting the goods does not pay the tariff. The importer pays it. Studies reviewed by the Financial Times found that when a 20 percent tariff was imposed, U.S. importers paid nearly 19 percent of the added cost, while foreign suppliers reduced prices by only about 1 percent. Most of the burden stays with American businesses, which may pass costs on to consumers or absorb them to stay competitive.
Why Do Tariffs Exist?
Tariffs have been used for thousands of years as a tool for managing trade and collecting government revenue. In ancient Greece and Rome, they helped fund public projects and protect local industries. In the United States, the Tariff Act of 1789 was one of the first major sources of federal income and played a key role in protecting early American manufacturers.
Today, governments use tariffs for a variety of reasons:
- To encourage consumers to buy domestically produced goods by making imported items more expensive
- To raise revenue for government operations
- To respond to unfair trade practices or negotiate better trade terms
- To protect essential industries deemed vital for national security, ensuring domestic supply of critical goods, particularly during times of conflict.
While the goals may vary, tariffs remain a common part of global trade policy.
How Do Tariffs Work?
Tariffs are taxes placed on imported goods. They are paid by the business or individual bringing the goods into the country, not by the foreign exporter. While the concept is simple, the effects of a tariff can be far-reaching.
Here’s how the process typically works:
- A U.S. business purchases goods from a foreign supplier.
For example, a company may place a $10,000 order for materials from overseas. - The goods arrive at a U.S. port of entry.
U.S. Customs and Border Protection checks whether a tariff applies to the imported items. - A tariff is calculated and collected.
If a 15 percent tariff applies, the importer pays $1,500 in tax to the U.S. government. The foreign supplier still receives the full $10,000. - The importer now carries a higher cost.
The business must decide how to respond. It may raise prices, cut expenses, renegotiate with suppliers, or absorb the added cost. - The effect travels through the supply chain.
Price increases may affect other businesses that rely on the imported product, including wholesalers, retailers, and service providers. - Consumers may feel the impact at checkout.
If businesses pass on the cost, customers end up paying more for the same goods.
While the tariff is paid at the border, its effects can ripple across every stage of the product’s journey, from raw material to retail sale.
Types of Tariffs
Tariffs come in a few common forms:
- Ad valorem: A percentage of the product’s price
- Specific: A fixed dollar amount per unit (such as per item or per pound)
- Compound: A combination of both a percentage and a fixed amount
- Mixed: A tariff that can vary depending on the product or pricing structure
How Tariffs Affect Small Businesses
Tariffs increase the cost of imported materials and products. Small businesses, which often operate on tighter margins, may struggle to absorb those costs. Many are forced to raise prices, switch suppliers, or delay hiring and expansion.
A 2023 KPMG report found that over half of U.S. companies saw shrinking profit margins due to tariffs. Smaller firms were hit hardest.
What Can Small Businesses Do?
Higher tariffs are posing real challenges to small businesses across the country. However, there are practical steps that can help manage the impact. According to the U.S. Chamber of Commerce, here are several strategies small businesses are using:
- Diversify suppliers by sourcing from countries with lower or no tariffs, or by shifting to domestic vendors when possible
- Negotiate with existing suppliers to share the cost of tariffs, or secure better pricing through bulk purchases or long-term contracts
- Adjust pricing to reflect increased costs, while maintaining clear communication with customers about the reasons for changes
- Review budgets and reduce non-essential spending to preserve cash flow
- Stay informed about trade policy changes to anticipate cost shifts and adjust business operations accordingly
Taking these steps can help small businesses stay flexible and competitive in a changing trade environment. For additional support, businesses can explore loan and capital resources from AmPac to help manage cash flow, fund inventory, or invest in supplier diversification.
Final Thoughts
Tariffs are one of many tools that governments use to manage trade. They can support domestic industries, raise revenue, or serve as a response to international trade concerns. At the same time, they often lead to higher costs for American importers and may result in increased prices for consumers.
Understanding how tariffs actually work helps clear up confusion, especially in a time when global trade decisions have very real effects on businesses and households across the country.