DailyDime

Tariffs 101: What They Are, How They Work, and Who Really Pays

On April 2, 2025, the U.S. government announced a new round of tariffs, part of what’s been called “Liberation Day” by some in Washington. These new tariffs hit a wide range of imported goods, from industrial components to things as simple as rubber dog toys. While they may sound like a win for domestic manufacturing, tariffs often create ripple effects that hit businesses, consumers, and the economy hard.

Let’s break it all down.

What Are Tariffs?

A tariff is a tax imposed by a government on goods imported from other countries. When a company brings in foreign-made products to sell in the U.S., it must pay this tax to the U.S. government.

Countries can impose tariffs on nearly any imported good. Sometimes tariffs are used to retaliate against another country’s trade practices, protect domestic industries, or raise revenue, but no matter the reason, someone always pays.

A Simple Example: ACME Dog Toys

Imagine a fictional company, ACME, that makes and sells dog toys in the U.S. They manufacture the toys in Brazil because of the country’s low-cost, high-quality rubber production. It costs ACME $10 to make each toy, and they sell them for $20.

Now, let’s say the U.S. imposes a 50% tariff on goods imported from Brazil.

Cost to Make Toy	$10
Tariff Rate	50%
Tariff tax paid by ACME Company	$5

So, for every toy ACME imports, they must now pay $5 to the U.S. government.

How Tariffs Hurt Gross Profit

Here’s a quick look at ACME’s profit on each toy with and without the tariff:

Category	No Tariff	50% Tariff
Price to Customer	$20	$20
Cost of Goods	-$10	-$10
Tariff Tax	-$0	-$5
Gross Profit	$10	$5

At first glance, $5 profit per toy might seem fine. But many companies rely on gross margins of 30 – 50% to cover all their other costs like payroll, rent, and marketing. A hit to margin this big can be a game-changer.

The Ripple Effect on the Bottom Line

Let’s say ACME sells 1 million dog toys per year:

Category	No Tariff	50% Tariff
Sales	$20M	$20M
Cost of Goods	-$10M	-$10M
Tariff Tax	-$0	-$5M
Gross Profit	$10M	$5M
Payroll	-$7M	-$7M
Rent	-$500k	-$500k
Insurance	-$500k	-$500k
Marketing	-$1M	-$1M
Net Profit	$1M	-$4M

Before tariffs, ACME earns a solid $1 million in annual profit. After tariffs? They’re losing $4 million per year. This isn’t sustainable, so something has to give.

How Companies Can Respond

Here are ACME’s main options:

1. Move Manufacturing

They could try to make the toys in the U.S. but the cost would jump to $50 per toy. Even shifting to another low-cost country might only lower costs to $15 – $20. Brazil is still the cheapest, so moving is difficult.

2. Cut Expenses

They could lay off workers or downsize their office but most of their 70 employees are needed for sales, customer service, and operations. There’s little fat to trim.

3. Raise Prices

Most likely, ACME would raise prices from $20 to $25 to cover the tariff. That leads us to the consumer impact.

What Happens to Consumers?

Now ACME’s dog toys cost $25 instead of $20, a 25% increase. While $5 might not seem like much, imagine that same markup on:

• $50,000 cars
• $2,000 laptops
• $150 shoes

Multiply that across your household spending and it starts to feel a lot like… inflation.

A Quick Look at Inflation

Inflation is when the general price level of goods and services rises, eroding purchasing power. You’re paying more, but your income hasn’t increased, so your money buys less.

Mild inflation (2–3%) is normal. But 25% inflation on key goods, especially household necessities can hit middle-class families hard.

The Real Cause and Effect

When tariffs increase costs for businesses, those businesses often raise prices to stay afloat. Those price hikes are passed on to consumers. It’s not complicated:

Tariffs → Higher Business Costs → Higher Prices → Inflation

Here’s a great quick visual breakdown:
https://youtube.com/shorts/Mj6N-WBPrVw?si=FONHgt7Yj_GQqGjn

Other Downsides of Tariffs

Beyond inflation, tariffs create a range of additional problems:

Less Competition

Fewer imports means fewer choices. With lower supply and steady demand, prices rise even more. Consumers lose.

Favoritism and Lobbying

Big corporations can afford lobbyists to win tariff exemptions. Small businesses can’t. This leads to uneven playing fields and market distortions.

Supply Chain Complexity

Tariffs on individual components make it harder and more expensive to manufacture complex products like smartphones, appliances, and cars, many of which rely on global supply chains.

Lower Company Valuations

Public and private companies alike suffer from lower profits due to tariffs. That hurts shareholder value, stock prices, and employee bonuses or stock options.

Black Market Activity

Tariffs create incentives for illegal smuggling or unsafe products entering the market. Products that skip safety inspections (like toys with lead paint) could end up in consumers’ hands.

Are Tariffs Ever a Good Idea?

There are rare, valid reasons for tariffs:

• National security: Restricting trade with hostile nations like North Korea
• Pandemic resilience: Encouraging domestic production of medicine or PPE
• Geopolitical pressure: As leverage in negotiations

But even in those cases, offering positive incentives (like tax breaks or subsidies) is often a better approach than punishing taxes.

For example, instead of taxing ACME $5 per toy, the government could help domestic manufacturers lower their costs through SBA funding, capital grants, or deregulation, encouraging U.S.-based production without raising consumer prices.

Final Thoughts

Tariffs are an economic tool but a blunt one. While they might offer short-term political wins, they almost always raise prices, reduce competition, and hurt both companies and consumers.

The better long-term strategy? Lower tariffs, increase fair competition, and support domestic production through innovation and smart incentives, not taxes.