By Dr. Wafa Hakim Orman

Tariffs have dominated recent headlines, promoted as a tool to protect American jobs, to revitalize our industrial base, or to gain leverage in international negotiations. International trade, tariffs, and their short and long term consequences are a fairly nuanced and complex issue, but too often the nuance is lost amidst the politics on both sides. As an economist, my goal is to look past the rhetoric and shed some light on how tariffs actually impact our businesses and industries.

What is a tariff? A tax on imports. Tariffs are different from other taxes in that they don’t apply to goods produced within our borders.

Who pays a tariff? In the United States, Customs and Border Protection agents collect tariffs at the port of entry into the country from importers. But the real question of who pays is much more nuanced.

When we have any kind of excise or sales tax on a product, the seller has a choice: pass along the entire tax to the buyer, absorb it themselves, or adjust the price of the product so that the burden of the tax is shared between the buyer and the seller.

Consider a gold necklace imported from India, valued at $200 with a 5% tariff. At a normal 30% markup, the retail price would be $260 without a tariff. With a tariff, the importer’s cost is now $210, so with a 30% markup, the retail price of the necklace is $273 with the full tariff passed on. However, the importer might also price the necklace between $260 and $273, reducing their profit margin so as to share the burden of the tax between them and the customer. Or they might negotiate a lower price of $190.48 with their supplier in India, so that they still pay $200 after a 5% tariff. In this instance, the burden of the tax is borne by the supplier in India.

Which of these options the importer chooses depends on market conditions, customer price sensitivity, and supplier relationships.

Second order effects: Past the immediate effect on prices, there are more far-reaching consequences of tariffs. First is the effect on the value of the dollar itself. Even if we pay foreign suppliers in US dollars, they need to convert those dollars to their local currency. Since $1 = about 87 Indian rupees (as of February 12, 2025), the supplier in India receives 17,398 rupees for the necklace. If tariffs are widespread, then as imports become more expensive for Americans, the US dollar is likely to rise in value relative to other currencies. If the dollar appreciates by 5%, so that $1 = 91.35 Indian rupees, then even if the importer negotiates a price of $190.48 with the supplier, the supplier still receives 17,398 rupees. The effect of the tariff is canceled out by the rise in the value of the dollar.

Reality is a bit more complicated: researchers at Johns Hopkins University estimated that increased tariffs on imports from China in 2018-19 explained about 20% of the dollar appreciation but around two thirds of the renminbi depreciation observed during that time period.

There is one more very important second order effect: no one imposes tariffs in a vacuum. Other countries can, and typically do, retaliate. And when they do, the tariffs that they impose on our exports mean that we export less, and we lose jobs in our exporting industries.

In 1930, the Smoot-Hawley Act raised average tariffs from 40.1% to 59.1%. Most of our largest trading partners, including Canada, Mexico, Argentina, and France, among many others, retaliated by increasing tariffs on their imports from the US. While imports fell by over 60%, our exports to these countries also fell by around 28-32%. Unemployment rates in the US did not decline at all — on the contrary, they rose from just over 3% in 1930 to a peak of 25% in 1933. The tariffs sparked multiple trade wars, led to a 65% decrease in global trade, and worsened the Great Depression. This historical lesson led to the creation of the World Trade Organization (formerly GATT), in order to prevent destructive trade wars and promote stable international commerce.

Global supply chains: Global supply chains are now highly interconnected. Consider automotive manufacturing, where components can cross borders between the U.S., Mexico, and Canada up to seven times before final assembly, with potential tariffs at each crossing. Even the Mazda CX-50, built here in North Alabama, sources about 25% of its components from Mexico. Tariffs have a large impact on our domestic manufacturing base, as many American-made products rely heavily on imported components. Steel and aluminum tariffs on imports from Canada and Mexico alone have cost US light vehicle manufacturers almost $500 million per year. In a globally interconnected economy, tariffs can significantly impact our ability to export competitively.

Further, tariffs targeting specific countries may lead to shifts in global supply chains rather than bringing jobs home. When the U.S. increased tariffs on Chinese goods in 2018-19, many manufacturers simply moved their operations to Vietnam instead of relocating to American soil. Companies often find it more cost-effective to shift production to other low-cost countries rather than return manufacturing to the U.S.

The reality is that tariffs are a blunt instrument that risk doing more harm than good. Building a strong, competitive industrial base demands strategic investments in workforce development and infrastructure, and streamlined regulations. It requires nurturing entire manufacturing ecosystems, from suppliers and skilled workers to research facilities and transportation networks. As our region continues to attract new industry and expand existing operations, these fundamentals are the key to sustainable growth and economic resilience. Understanding trade policy remains crucial for local businesses, but our future success will depend more on our ability to build, train, and innovate than on any tax at the border.

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Dr. Wafa Hakim Orman is the associate dean of UAH’s College of Business, as well as an associate professor of Economics. Dr. Orman earned her Ph.D. in economics from the University of Arizona.