Friday Fundaa | "China will pay for it" - a short lesson in how tariffs actually work

A short weekly moment of "huh, didn't know that" from the world of markets and money.

A year ago, April 2, 2025 happened. "Liberation Day." Blanket tariffs on imports from most of the world. The announcement came with a promise you've heard many times since: the other countries will pay.

A year on, prices are higher, economists are still arguing, and most people still aren't clear on the basic mechanism. So let's do this properly.

They don't pay. You do. And that's not a political take, it's just how tariffs work.

A tariff is an import tax. When a US company buys goods from overseas (shoes, electronics, steel, whatever) and ships them into the country, US Customs collects a tax at the border based on the declared value of the goods. That tax is paid by the US importer. Not the factory in China. Not the government of Vietnam. The American company writing the cheque to get the cargo released.

That's it. That's the whole mechanism. The foreign seller doesn't see a bill. They got paid when they sold the goods. The tax bill goes to whoever is standing on the US side of the border.

So where does that cost go next?

Exactly where you'd expect. The importer adds it to the price they charge the wholesaler. The wholesaler adds a margin and charges the retailer. The retailer adds their margin and charges you. By the time a $25 pair of sneakers made in a Vietnamese factory clears US Customs with a 46% tariff slapped on it, you're looking at a $36 pair of sneakers. The factory got their $25. The US government collected about $11. You're out $36.

The foreign manufacturer is not paying for your administration's trade policy. You are.

"But doesn't the exporting country lose business?"

Sometimes, yes. If a tariff is high enough, US buyers switch to domestic suppliers or suppliers from countries with lower tariff rates. That does hurt the targeted country's exports, and that's the intended economic pressure. But losing business is different from paying a tax. The tariff revenue doesn't go to them. It comes from you.

There's also a catch: switching suppliers isn't free or instant. You feel it at the grocery store, in the shoe aisle, and at the electronics counter. The numbers since Liberation Day are real.

Avocados: about 90% of US supply comes from Mexico, which got hit with a 25% tariff. A pound of avocados that cost $0.87 before the tariffs averaged $1.45 over the following year, peaking at $1.79. A household buying two avocados a week paid roughly $36 more over the year. Bananas went from 50 cents to 54 cents a pound at Walmart, small but notable enough that Walmart said it "isn't able to absorb all the pressure."

Levi's raised the price of women's jeans from $98 to $108. Men's from $79.50 to $84.50. The company's own earnings calls used the word "tariffs." Nike added $5 to shoes in the $100-$150 range and $10 to anything above that. A PlayStation 5 that cost $499 on Liberation Day costs $649 today; Sony has raised prices twice in the past year, citing "global economic pressures."

Put it together and Yale Budget Lab estimated the average US household is paying roughly $2,400 more per year across all the 2025 tariffs. The New York Fed was more direct: over 90% of the tariff burden falls on US consumers and businesses. The foreign country's export prices barely moved.

So why do governments use tariffs at all?

There are legitimate reasons.

The negotiating leverage argument: if you're trying to pressure a country into a trade deal, threatening their exporters with reduced US market access is real leverage. It's messier than it sounds (see above), but it does give you something to bargain with.

The infant industry argument: some industries (semiconductors, clean energy manufacturing) may need protection to develop before they can compete globally. Temporary tariffs can buy time. The key word is temporary; most tariffs, once in place, tend to stay.

The national security argument: you don't want to be entirely dependent on a single country for steel, pharmaceuticals, or microchips. Some trade restrictions serve genuine strategic purposes.

These are real arguments. Economists debate them seriously. But none of them are the same as saying "the other country pays." The costs are domestic. The benefits, if there are any, are also domestic. The question is always whether those benefits outweigh the costs, and that depends entirely on what you're actually trying to achieve.

One more wrinkle: retaliation

When one country raises tariffs, the other usually retaliates. After Liberation Day, China responded with 125% tariffs on US goods. American exporters (agricultural producers, manufacturers) suddenly faced a wall when trying to sell into their biggest overseas market.

So the chain often looks like this: tariff, domestic price increase, foreign retaliation, domestic exporters lose markets, government aid discussions begin, taxpayers cover the cost. The other country didn't pay. The bill circled back.

None of this means tariffs are always wrong. Trade policy is genuinely complex, and sometimes the strategic calculation really does make them worth it. But "they'll pay for it" is not an accurate description of how the mechanism works. Now you know what actually happens.

The tariff gets paid at the US border by a US company. The cost travels downstream to a US consumer. The foreign government watches and, if they feel like it, hits back.

That's Liberation Day, a year later, finally explained.

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Read this issue on the web: frameworkfoundry.info/fundaa/2026-04-04/index.html