How Tariffs Impact the Economy, and What Merchants Can Do About It

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By: Becky Sarwate
Posted: April 30, 2025


Tariffs have emerged as front-page news with recent announcements of proposed increases in the cost of imports from many countries into the United States. For merchants like you, understanding the implications of tariffs is critical. As just one example, the tariffs could signal an increase in import costs, and/or potential shifts in consumer demand.

Anticipating the specific impacts on your supply chains and pricing strategies is essential to navigating these changes, and safeguarding your business.

Introduction to tariffs and their impact on merchants

Tariffs are additional costs added to the cost of imported goods. When the government adds a 25% tariff on products from Canada for example, it means an additional 25% cost on affected goods at the border before they enter the U.S. market. Those costs then ripple through the supply chain, eventually affecting merchants' bottom lines and consumers' wallets.

How tariffs shaped commerce in the past

Tariffs have played a significant role throughout U.S. economic history. Before the federal income tax was established in 1913, tariffs generated most of the federal government's revenue.

The lessons from history are mixed. For example, during the Great Depression of the 1930s, many countries raised tariffs, hoping to protect domestic manufacturing jobs. Instead, however, a series of retaliatory tariff increases choked off world trade, deepening the economic crisis and worsening job losses.

This historical example highlights the challenge of using tariffs for targeted purposes. Instead of having a precise impact on products or countries, they can create waves that spread throughout the economy, affecting businesses that may seem far removed.

The purpose of tariffs

Governments usually implement tariffs for one or more of several common reasons:

  • To raise revenue
  • To protect domestic industries from foreign competition
  • To address perceived unfair trade practices
  • As leverage in international negotiations
  • To achieve geopolitical objectives

Certain businesses may temporarily benefit from tariffs, particularly those that compete directly with imported goods. U.S. steel producers, for example, could see prices rise when foreign steel imports face tariffs.

Among the business risks inherent in the above steel scenario, however, is a potential stifling of innovation. And as Christopher Meissner of UC Davis notes, "Less competitive industries are [often] less innovative, and less innovative industries are [often] less productive." By way of example, his research shows that tariffs levied in the late 1800s in the U.S. reduced domestic productivity by 25–35%, rather than strengthening industries as originally intended.

How tariffs work, and the potential impact on your operations

Tariffs can reshape supply chains and force strategic decisions that determine a business's profitability. Strategic planning allows you to develop resilient business models to withstand trade policy fluctuations.

How tariffs are implemented: A past example and merchant responses

When a government announces new tariffs, the implementation typically follows a similar pattern. The announcement names specific products, countries and tariff rates. The United States uses the Harmonized Tariff Schedule (HTS), a complex classification system that categorizes every possible import.

For example, in 2018, the U.S. imposed Section 232 tariffs on imports of steel (25%) and aluminum (10%). These tariffs affected approximately $29 billion in steel imports and $17.6 billion in aluminum imports (York, 2024).

Merchants responded in various ways:

  1. Absorbing costs: Some merchants, especially larger ones with better margins, absorbed some tariff costs temporarily to maintain market share.
  2. Passing costs to consumers: Many retailers had no choice but to raise prices.
  3. Diversifying supply chains: Some businesses began sourcing from non-tariffed countries.
  4. Stockpiling inventory: Many merchants increased orders to build inventory at pre-tariff prices before tariff implementation.

Types of tariffs: How different types have affected various industries

Tariffs come in several forms, each affecting merchants differently. Your industry might be impacted by specific tariff types, based on how your products are classified and where they originate.

Ad valorem tariffs

The most common type is calculated as a percentage of the imported good's value. For example, a 25% tariff on a $100 item results in a $25 tariff payment.

Specific tariffs

Fixed amounts are charged based on weight or quantity, regardless of value — for example, $0.50 per pound of imported cheese.

Compound tariffs

Combine ad valorem and specific tariffs — for example, 10% of value plus $0.15 per unit.

Tariff rate quotas

Apply one tariff rate up to a specific quantity and a higher rate beyond that threshold.

For retailers of consumer goods, especially those with thin margins, even small tariff increases can force difficult choices between raising prices or accepting lower profits. Meanwhile, manufacturers using imported components face complex calculations about redesigning products, finding alternative suppliers or relocating production.

Economic impact of tariffs and merchant strategies

Tariffs can create economic ripple effects that extend far beyond the initial tax at the border. Whether you are importing directly or simply using products with imported components, tariffs may affect your business in both predictable and unexpected ways.

Immediate effects on prices and trade: Historical merchant reactions

When tariffs hit, the first impact is almost always on prices. 

Historically, merchants have used several pricing strategies in response:

  1. Targeted price increases: Raise prices on selected products while maintaining others to balance consumer perception.
  2. Bundling: Add value through bundling or services to justify necessary price increases.
  3. Reformulating products: Change product specifications to reduce reliance on tariffed components.
  4. Keeping customers in the loop: Some businesses temporarily absorb increases while communicating to customers that future price adjustments may be necessary.

Thinking strategically about what consumers will and won't tolerate helps you plan which price increases might be less disruptive to consumer behavior.

How U.S.-levied tariffs can affect the nation's economy

While the impact pathway is hard to predict, tariffs could affect the broader economy through multiple channels.

  1. Reduced purchasing power: Higher prices may mean consumers can afford fewer goods, potentially slowing economic growth.
  2. Supply chain disruption: Companies might rethink sourcing strategies, often at considerable cost.
  3. Decreased global competitiveness: United States companies using tariffed inputs could  become less globally competitive.
  4. Employment changes: Some protected industries may add jobs while others shed workers.
  5. Retaliatory tariffs: Trading partners may respond with tariffs, which could harm certain U.S. exporters.

Short-term vs. long-term economic effects: How businesses have navigated these cycles

In the short term, tariffs can create price shocks and operational disruptions. Businesses often react by raising prices, negotiating with suppliers or accepting margin compression.

For example, 2018 tariffs failed to lower the import prices of Chinese goods, and the additional taxes were almost entirely passed through to U.S. importers and consumers. The Federal Reserve Bank of Richmond confirms this finding, noting that empirical research has found tariff pass-through rates "generally high (often near 100 percent)," meaning the burden typically falls on domestic consumers and firms, rather than foreign exporters.

Here are some common approaches businesses have used to weather the tariff cycle:

  • Maintaining flexible supply chains with multiple sourcing options
  • Keeping higher inventory buffers during uncertain times
  • Developing strong relationships with customers to facilitate honest communication about price changes
  • Investing in operational efficiency to offset tariff-related cost increases

Impact on consumers and the resulting merchant challenges and opportunities

Different industries have vastly different tariff exposure levels, affecting which product categories will see the greatest disruption in availability. At the county level, the geographic impact of tariffs has been highly uneven, with manufacturing-intensive regions like the Midwest facing much higher tariff burdens.

For retailers, this means that stores in certain regions may face more significant supply disruptions and price pressures based on their local economy's exposure to tariffed industries.

Changes in consumer prices: How merchants adjusted in the past

Merchants have developed several approaches to manage these challenges:

  1. Help consumers understand: Explain price increases and their causes
  2. Increase prices gradually: Implement changes gradually rather than all at once
  3. Highlight your product's value: Emphasize quality and durability over price
  4. Expand your private label: Develop alternative product lines with more pricing flexibility
  5. Offer loyalty incentives: Offering programs to retain customers despite price increases

Consumer choice and availability of goods: Historical impacts on retailers

Beyond price effects, tariffs can reduce product variety as some imports become unprofitable to carry. This situation presents challenges, even as some opportunities become apparent.

Challenges:

  • Customer disappointment with discontinued products
  • Complexity in forecasting demand for new alternatives
  • Potential loss of market segments focused on specific imports

Opportunities:

  • Differentiation through sourcing from non-tariffed countries
  • Development of exclusive domestic alternatives
  • Creation of "made in USA" marketing campaigns
  • Specialization in product categories less affected by tariffs

Preparing your business for tariff changes

Given these realities, how can merchants best position themselves? You want to prepare specific, targeted actions rather than general caution. Here are actionable strategies that have worked in the past.

  1. Assess your tariff exposure by product category.
  2. Diversify supply chains by identifying specific alternate sourcing locations for your highest-risk products.
  3. Renegotiate contracts with tariff clauses.
  4. Build strategic inventory buffers, focusing on components with the highest tariff exposure and longest replacement timelines.
  5. Segment your pricing strategy with a tiered approach to price increases based on product elasticity.
  6. Map your competitors' exposure and prepare to capture market share as they struggle.
  7. Create consumer messaging that explains necessary price increases in terms of specific external factors.
  8. Explore trade finance options for importers facing tariff pressures.
  9. Explore whether final assembly or significant transformation could occur in non-tariffed countries to change origin status.
  10. Implement specific strategies, such as foreign trade zones, bonded warehouses or duty drawback programs, to defer, reduce or recover tariff payments.

Conclusion

Tariffs can represent a significant challenge for merchants, but historical examples show that adaptable businesses can navigate these disruptions successfully. By understanding the mechanics of tariffs, anticipating their effects, and implementing strategic responses, merchants can protect their businesses while continuing to serve their customers.

While you can't control government trade policies, you can control how you prepare for and respond to them. In doing so, you may discover new strengths and capabilities that serve you well long after the current tariff situation evolves.

Sources

North is a leading financial technology company that builds innovative, frictionless end-to-end payment solutions designed to simplify and grow businesses of all sizes. From the front door, to the back office, the developer world, and partnerships that expand the payments landscape, North offers proactive, comprehensive merchant services, in-house processing, and more.