Several studies, including this one, demonstrate that raising the cost of goods (in this case via tariffs) also raises consumer prices and/or reduces demand because of higher prices.
If the cost to produce a good or provide a service is increased for any reason, say forced wage increases, won’t the same thing occur? If a firm is unlikely to absorb from its income and profit a 10% tariff why would it do so with a ten percent wage increase absent increased productivity?
The magnitude of these costs depends on how a tariff affects the prices charged by foreign exporters and the U.S. demand for imported goods. Studies, including our own, have found that the tariffs that the United States imposed in 2018 have had complete passthrough into domestic prices of imports, which means that Chinese exporters did not reduce their prices. Hence, U.S. domestic prices at the border have risen one‑for-one with the tariffs levied in that year. Our study also found that a 10 percent tariff reduced import demand by 43 percent.
U.S. purchasers of imports from China must now pay the import tax in addition to the base price. Thus, if a firm (or consumer) is importing goods for $100 a unit from China, a 10 percent tariff will cause the domestic price to rise to $110 per unit. This adds a $10 cost per unit for buyers of imports, but it is not a true cost for the U.S. economy because the money is simply transferred from buyers of imports to government coffers and thus could, in principle, be rebated.