Understanding US Tariffs - A human perspective

Senthil Kumaran

2025-08-10 16:56

What Are Tariffs?

Tariffs are taxes that governments put on products coming from other countries. When a company imports goods, they have to pay this extra tax to bring those goods into their country. For example, when the U.S. puts a 50% tariff on Ayurvedic turmeric from India, an American company that wants to buy that turmeric has to pay 50% more than the original price to import it for U.S. consumers. The Indian company selling the turmeric doesn't pay this tax - it's the American importing company that pays it to the U.S. government.

The key insight is that tariffs are always paid by the importing country's businesses, not the exporting country. This is often misunderstood in public debate, but it's crucial to understand who actually bears the cost.

A Specific Example

Let's say a person in Los Angeles, CA wants to buy a toy at Walmart:

Without tariffs: A toy made in China costs $10 at Walmart
With 30% tariff: Walmart pays $3 extra in tariffs to the U.S. government, so the same toy now costs $13 at Walmart ($10 + $3 tariff passed to customer)
Result: American buyers pay higher prices for the same products, or they might choose to buy fewer toys, or look for American-made alternatives if available

When tariffs are imposed by the U.S. government, any U.S. importing company pays the money to the U.S. government as a tax for importing those goods. For example, Walmart, the largest U.S. retailer (headquartered in Bentonville, Arkansas), imports electronics, toys, and household goods from Chinese manufacturers. When Walmart imports these products from China, Walmart pays the tariff to the U.S. government. Walmart then adjusts the price and profit margins to remain competitive in the U.S. consumer market. According to Walmart CFO John David Rainey, about 34% of Walmart's imports come from China, and the company has had to raise prices on toys, electronics, and household goods due to tariffs.

The theory of tariffs supports the domestic production economy of the U.S. However, if there are no domestic U.S. alternatives available, the importing company pays more taxes to the U.S. government and raises the prices of products for U.S. consumers, with consumers bearing the full cost increase.

How Tariffs Work Step by Step

Stage	Price	Explanation
Foreign Factory	$100	Original manufacturing cost
At U.S. Border	$125	Importer pays $25 tariff (25% of $100)
To Consumer	$150	Store adds markup on the $125 cost

Companies handle this in three ways:

Raise prices for customers (happens most often): Add the full tariff cost to the selling price
Keep prices the same: Make less profit to stay competitive
Split the difference: Raise prices a little and accept lower profits

The 2025 U.S. Tariff Changes: From Low to High

In 2025, the United States made big changes to its tariff system. The average tariff rate went from 2.5% to 18.6% by August 2025. This was the highest level since 1934. These changes affect over $2.3 trillion worth of products coming into the U.S.

When the Changes Happened

Date	Country/Region	Tariff Impact	Price Effect for U.S. Consumers
February 1, 2025	Canada and Mexico	25% tariffs	Products from these countries cost 25% more
February 1, 2025	China	20% extra tariffs	Chinese products cost 20% more (in addition to existing tariffs)
March 4, 2025	All Countries	Steel and aluminum tariffs doubled to 50%	Steel and aluminum products cost 50% more
April 2, 2025	Most Countries	New tariffs announced (10% starting point)	Products from most countries cost at least 10% more
April 9-11, 2025	China	Tariff increases reaching 145%	Chinese products cost 145% more (before later reduction)
August 7, 2025	India	Highest tariffs at 50%	Indian products cost 50% more

Impact Matrix (US vs India × Producers vs Consumers)

	Producers (firms, industries)	Consumers (households, buyers)
US	- Textiles: potential demand gain as Indian apparel becomes costlier (positive). - Steel & aluminum: protected by 50% tariffs; downstream users face higher input costs (mixed). - Jewelry: potential market-share gain vs Indian imports; gold inputs pricier (mixed). - Import-dependent sectors: pharma APIs, electronics/components, and retailers face margin pressure (negative). - Exporters: defense contractors lose India orders; risk of retaliation (negative).	- Overall prices: +1.8% in 2025; ≈$2,400 per household; regressive burden (negative). - Apparel: Indian shirts +50% (negative). - Jewelry: +50% (negative). - Spices/food: +50% (negative). - Electronics: components +37% (negative). - Leather goods: +39% (negative). - Regional/demographic: urban areas hit more; Indian-American communities see larger effects (negative).
India	- Export sectors: textiles, jewelry, marine products, leather under pressure; job-loss risk (negative). - Defense manufacturing: import substitution opportunity (positive). - Energy sector: higher-cost US oil volumes up; margins pressured (mixed to negative). - Domestic-focused sectors: IT services, FMCG, banking, local manufacturing relatively insulated (neutral). - Diversification: pivot to EU, Middle East, ASEAN (positive medium term).	- Energy: higher prices from shift to costlier US oil reduce purchasing power (negative). - Currency: weaker rupee raises costs of imported tech, petroleum, industrial inputs, travel/education (negative). - Potential retaliation: costlier US tech, ag products, machinery, media (negative). - Domestic market protection: many daily goods are local; direct tariff pass-through limited (neutral), but indirect effects via energy/currency persist (negative). - Income effects: households tied to export sectors face wage/employment pressure (negative).

Cross-reference guide for readers:

US Consumers → see “Consumer Price Effects” (US perspective and product examples)
US Producers → see “Global Economic Reshaping” (US Domestic Winners/Losers)
India Producers → see “Indian Economy – Sectoral Impact” and “New Trade Patterns Emerging”
India Consumers → see “From an Indian Consumer Perspective”

The US-India Trade Relationship - A perspective

Bilateral Trade Volume: US-India total goods trade was estimated at $129.2 billion in 2024. That is US selling about $41.5 billion dollars worth of goods to India, and India selling about $87.3 billion dollars worth of goods to US.

Key Trade Sectors

India's Top Exports to the US:

Engineering goods, electronic items, and pharmaceuticals account for over 51% of total exports
Gems & jewelry contribute significantly to Indian exports to the US
Textiles and garments represent a major labor-intensive export sector
Chemicals and auto components
Marine products and agricultural items

US Exports to India:

Mineral fuels and oils
Precious stones and gems
Nuclear reactors and machinery
Agricultural products (a contentious area due to Indian protections)
Defense equipment and technology

How Tariffs Worked Before 2025

Before 2025, there was a big difference in how much each country charged for imports:

From US Perspective:

When Americans bought Indian products, they paid very low tariffs (around 3.3% extra)
A $100 Indian shirt cost about $103 in American stores
American farm products faced much higher tariffs when sold to India (39% average)
A $100 American agricultural product cost $139 for Indian buyers

From Indian Perspective:

When Indians bought American products, they paid much higher tariffs (17% average for most goods, 39% for farm products)
A $100 American iPhone cost about $117 in Indian stores due to tariffs
A $100 American agricultural product cost $139 due to India's high farm tariffs
This made American products much more expensive for Indian families

India: With the Tariff Rate of 50%

Impact on U.S. Consumers:

U.S. consumers will pay 50% more on $87 billion worth of Indian products (jewelry, clothing, spices, textiles) - that's 20% of all products Americans buy from India
India's economy could shrink by 0.6% because when American consumers buy fewer Indian products due to higher prices, Indian companies lose sales and may have to cut jobs.
$8 billion worth of specific products Americans regularly buy will become much more expensive: gold jewelry at stores like Kay Jewelers, clothing from Indian textile companies, spices and turmeric at grocery stores, and chemicals used in American manufacturing

How India has Responded:

Energy Diplomacy: India increased its oil purchases from the U.S. by 120% in the last six months, which was one of Trump's primary demands when Modi visited the White House in February 2025. However, this meant Indian consumers paid more for energy as the government shifted from cheaper Russian oil to more expensive American oil, reducing Indians' purchasing power for other goods. The challenge is that Russian oil often costs $10-15 per barrel less than American alternatives, making this a significant fiscal burden.
Trade Concessions Offered: India offered to remove tariffs on 55% of U.S. imports (worth $23 billion). This would make American products cheaper for Indian consumers - for example, a $500 iPhone might cost $400 instead. However, this could hurt Indian companies that compete with American products, potentially leading to job losses in Indian manufacturing. India also scrapped its 6% digital services tax as a goodwill gesture.
Protecting Indian Interests: India refused to change rules for farming and dairy, keeping protection for hundreds of millions of farmers and dairy workers from cheaper American agricultural imports. This means Indian consumers continue paying higher prices for milk and farm products, but it saves jobs for rural Indian workers who might not be able to compete with large American farms. The cost of allowing U.S. dairy exports into India is expected to cost India 1.8 lakh crore rupees ($20 billion) alone, according to SBI Research.
Defense Procurement Pause: India paused purchases of American missiles and vehicles as a retaliation method, according to Reuters reports citing three Indian officials. This includes discussions on purchases of Stryker combat vehicles from General Dynamics and Javelin antitank missiles from Raytheon and Lockheed Martin. This costs U.S. defense companies billions in lost export revenue and could lead to job losses at American defense manufacturers that depend on international sales.

Consumer Price Effects

From a US Consumer Perspective:

American families are experiencing what economists describe as the largest peacetime tax increase in nearly a century. The 2025 tariffs imply an increase in consumer prices of 1.8% in the short-run, equivalent to a $2,400 loss of purchasing power per household on average in 2025 dollars.

The distributional impact reveals the regressive nature of tariffs:

Poorest families (bottom decile): Additional $1,300 per year in costs
Middle-class families: Additional $2,200 per year in costs
Wealthy families (top decile): Additional $5,000 per year in costs

While wealthy families pay more in absolute terms, poor families are hit harder proportionally because they spend a larger percentage of their income on imported goods and have less flexibility to substitute expensive imports with domestic alternatives.

Specific Product Impact Examples:

Clothing: Indian-made shirts that cost $25 now cost $37.50 in US stores (50% increase)
Jewelry: A $1,000 gold necklace from India now costs $1,500 at Kay Jewelers
Spices and Food: Turmeric, cardamom, and other spices from India cost 50% more at grocery stores
Electronics: Smartphones with Indian components face 37% price increases
Home Goods: Leather products like shoes and handbags see 39% price increases

Regional Impact Variations: The impact varies significantly by region and demographics:

Urban areas: Face higher impact due to greater consumption of imported goods
Rural areas: Somewhat insulated due to higher consumption of domestically-produced food and goods
Ethnic communities: Indian-American communities face particularly severe impact as cultural products become prohibitively expensive

Real Family Examples: Consider a middle-class family in Ohio that previously spent $200 per month on Indian-made textiles, household goods, and spices. They now spend $300 for the same items, representing $1,200 annually in reduced purchasing power. For families already stretched by inflation in housing and healthcare, this represents a significant reduction in living standards.

Long-term Behavioral Changes: Beyond immediate price increases, families are changing consumption patterns:

Substituting higher-quality Indian products with lower-quality alternatives from other countries
Reducing overall consumption of affected product categories
Shifting spending away from discretionary items toward necessities
Increasing demand for domestic alternatives where available

From an Indian Consumer Perspective:

Indian consumers face a more complex set of pressures that arise both from their government's policy responses to US tariffs and from broader economic effects of the trade dispute.

Energy Cost Impact: India's decision to increase US oil purchases by 120% means Indian consumers pay more for energy. When the government shifts from cheaper Russian oil (often $10-15 per barrel less expensive) to American oil, this cost difference flows through to gasoline, diesel, and electricity prices. For a typical Indian family spending 15-20% of income on energy, this represents a meaningful reduction in purchasing power.

Currency Effects: The Indian rupee has weakened in offshore markets due to trade tensions, making all imports more expensive. When companies face higher costs due to currency depreciation, they often pass these costs to Indian consumers through higher prices for:

Imported electronics and technology
Petroleum products
Industrial inputs that affect manufactured goods prices
International travel and education costs

Retaliatory Impact: If India responds with its own tariffs on American products, Indian consumers could face higher prices for:

iPhones and other American technology products
American agricultural products (though these are already heavily protected)
Industrial machinery and equipment
Entertainment and media services

Domestic Market Protection: However, Indian consumers have significant protection compared to their American counterparts. Over 60% of India's GDP comes from domestic consumption, meaning most Indians buy locally-made products and won't directly feel the tariff impact. A typical family in Mumbai buying:

Clothes from Indian manufacturers
Food from domestic producers
Electronics assembled in India (though components may be imported)
Services provided locally

This family experiences limited direct impact from US tariffs, though they may face indirect effects through currency depreciation and energy costs.

Income Effects: The broader economic impact of lost export revenues could affect employment and wages in export-oriented sectors, indirectly reducing purchasing power for families connected to these industries.

Global Economic Reshaping

Trade Flow Changes

The US-India tariff dispute is creating clear winners and losers in the global economy, with effects that extend far beyond the two countries involved.

US Domestic Winners:

American textile manufacturers: May gain customers as Indian clothing becomes too expensive, though this depends on their ability to scale production rapidly
US steel and aluminum producers: Benefit from 50% tariffs on these materials from all countries, including India
American jewelry manufacturers: Could capture market share from Indian competitors, though they face higher input costs for raw materials
US agricultural exporters: May benefit if India retaliates against competitors like Australian beef or Brazilian soybeans

US Domestic Losers:

American consumers: Face $2,400 average annual cost increases per household
Import-dependent businesses: Pharmaceutical companies relying on Indian generic drug ingredients, electronics manufacturers using Indian components, and retailers selling Indian-made goods all face margin pressure
Export industries: US defense contractors lose billions in Indian defense procurement; other exporters may face Indian retaliation

Indian Economy - Sectoral Impact:

Export sectors: Textiles, jewelry, marine products, and leather face severe pressure with potential job losses affecting millions
Domestic-focused sectors: IT services, FMCG, banking, and domestic manufacturing remain relatively insulated
Energy sector: Benefits from increased US oil purchases but faces higher costs
Defense manufacturing: May benefit from import substitution as India reduces US defense purchases

Third-Country Beneficiaries:

Vietnam and Bangladesh: Gaining textile and manufacturing orders as US buyers shift away from India
European Union: Seeing increased Indian export focus as companies diversify away from US markets
Middle Eastern countries: Benefiting from Indian energy diplomacy and increased trade focus
China: Indirectly benefits as US-India tensions push India toward alternative partnerships

New Trade Patterns Emerging

India's Strategic Diversification:

India is rapidly accelerating export diversification to reduce dependence on the US market:

European Focus: Indian exports to EU countries up 9% as companies pivot away from the US market. Industries are fast-tracking the India-EU trade agreement negotiations to formalize this shift.
Asian Integration: India is planning Modi's first visit to China since 2020 at the Shanghai Cooperation Organisation summit, signaling potential reconciliation with China despite border disputes.
Middle Eastern Expansion: Leveraging cultural and business ties to expand in Gulf markets, particularly in textiles and jewelry.
ASEAN Engagement: Deepening integration with Southeast Asian economies as both an export destination and a manufacturing partnership hub.

US Supply Chain Reorganization:

American businesses are implementing "China Plus One" strategies that now need to become "China Plus India Plus One" strategies:

Mexican Manufacturing: USMCA benefits making Mexico increasingly attractive for US companies seeking to avoid high tariffs
Vietnamese Electronics: Despite 20% tariffs, Vietnam remains more competitive than India for electronics assembly
Domestic Reshoring: Some production returning to US, though limited by cost considerations and skilled labor availability

Global South Coordination:

Countries facing high US tariffs are increasingly coordinating responses:

BRICS Cooperation: India working more closely with Brazil (also facing 50% tariffs), China, and Russia on alternative trade arrangements
South-South Trade: Accelerating trade relationships between developing countries to reduce dependence on US market access
Alternative Payment Systems: Exploring non-dollar denominated trade to reduce US financial system leverage

These changes in 2025 has caught everyone by surprise, and this changing the world economic order in ways that will have be dealt with.