Tariffs, a key aspect of global trade, play a significant role in shaping economies and markets. These taxes are imposed by governments on imported goods and services, and while they are paid by the importing company, the broader economic effects are felt across industries, businesses, and consumers.

What Is a Tariff?

A tariff is essentially a tax that a country imposes on imported goods and services. Paid by the importing company, the tariff is usually calculated as a percentage of the item’s price. Governments impose tariffs for various reasons, including raising revenue, protecting domestic industries, and sometimes for political leverage. The hope is that by making foreign goods more expensive, consumers will turn to domestic alternatives, boosting local production. However, shifting to local products may not always be feasible or beneficial for consumers or businesses.

The Impact of Tariffs on Businesses and Consumers

While the importing company is responsible for paying the tariff, the financial burden is often passed along to various parties in the supply chain. This could include the importing company, its suppliers, or ultimately, the consumer. For companies that rely on imported goods, tariffs increase the cost of their supply chain. If the company doesn’t raise prices to cover the additional cost, their profit margins will shrink. Retailers reselling imported products face similar challenges, as higher tariffs could lead to price hikes, squeezing their margins.

The Difference Between Large and Small Companies

Larger companies typically have the upper hand when it comes to absorbing tariff costs. They have more pricing power and may be able to negotiate lower prices with suppliers, helping them reduce the impact of tariffs. Additionally, they are often better equipped to localize their supply chains, reducing reliance on imports. On the other hand, smaller companies might struggle with these adjustments, as they usually have fewer resources to offset the rising costs.

Effects on Foreign Competitors and International Trade

Tariffs can also influence competition. When foreign products become more expensive due to tariffs, domestic industries may experience reduced competition, potentially increasing their market share. However, this often leads to price increases for consumers and can hurt foreign companies as they lower their prices to maintain competitiveness. If foreign firms face significant losses, it could impact their home economies, potentially leading to retaliatory tariffs.

Retaliation can escalate trade tensions, causing trade wars where countries impose tariffs on each other’s goods. This may result in reduced global economic growth and job losses, particularly in industries that rely heavily on international trade.

Who Bears the Cost of Tariffs?

The cost of tariffs is often passed down the chain, with consumers feeling the pinch in the form of higher prices. This rise in costs contributes to inflation and can reduce consumer demand. Slower consumption, coupled with decreased business confidence, may lead to economic stagnation. Lower demand and thinner profit margins may also trigger higher unemployment rates as businesses scale back their operations.

How Tariffs Affect Trade Flows Globally

Trade flows differ across countries and industries, and tariffs can impact different sectors in various ways. For instance, the United States imports a significant amount of machinery and transport equipment, while exporting mainly commodities. Trade relationships with countries like Canada highlight the contrasting trade patterns: while the U.S. imports machinery from Canada, it exports different goods back.

The Impact of Tariff Uncertainty on Markets

Tariffs have fluctuated over the years, with some countries imposing higher tariffs on specific goods in recent years, especially in 2025. Such changes create uncertainty in the markets. When tariff increases were proposed by the U.S. in April 2025, global stock markets responded with volatility, seeing significant losses followed by gains once tariffs were scaled back.

This uncertainty can lead to market instability, affecting investment portfolios. Investors may face challenges navigating this period of unpredictability, especially if they have concentrated exposure to sectors or regions heavily impacted by tariffs.

Managing Uncertainty with Diversification

During periods of tariff uncertainty, a well-diversified portfolio can help mitigate risk. Diversification involves spreading investments across various asset classes, industries, and regions, which can help smooth out the fluctuations in returns. With a diverse mix of investments, portfolios may be better positioned to weather the storms of market volatility caused by tariffs.

In fact, diversification has proven to offer more stability. For example, a global 60/40 portfolio (60% equities and 40% bonds) typically has a smaller range of returns and experiences less severe drawdowns compared to an all-equity portfolio. This strategy allows investors to manage risk more effectively, especially when faced with uncertain external factors like trade policies and tariffs.

Conclusion

Tariffs are a key element of international trade that can have a ripple effect across the global economy. While their main goal is often to protect domestic industries, the broader impacts are felt by businesses, consumers, and foreign markets. Understanding how tariffs work, who bears the cost, and the potential economic consequences can help individuals and businesses plan for uncertainty. For investors, maintaining a diversified portfolio is one way to reduce the financial impact of tariff-related volatility and ensure more stable returns during uncertain times.