Understanding Tariffs - Producer/Consumer Perspective
I wanted to understand tariffs and how it affects people in US and India, in simple terms. I took this up to claude.ai, did plenty of research and asked questions for few hours to come up with this post. Simple examples are given for understanding, but real economic data is used to illustrate the impact of tariffs on consumers and producers in both countries.
Tariffs are extra taxes that governments make companies pay when they bring products from other countries. It is the fee for crossing the border with goods. The entity bringing the goods into the country pays this tax, not the seller from the other country.
Simple Example
When we buy a toy at Walmart that was made in China:
| Situation | Toy Price | Who Pays What |
|---|---|---|
| No tariff | $10 | You pay $10 to Walmart |
| With 30% tariff | $13 | You pay $13 to Walmart, Walmart already paid $3 tax to US government |
| Result | Higher price | Same toy costs you more money |
In the end, the Chinese toy maker still gets their $10. Walmart had to pay an extra $3 to the US government as a tariff tax, so they charge you $13 instead of $10.
How Companies Handle Tariff Costs
When companies face tariffs, they have three choices:
| Option | What Company Does | What Happens to Prices |
|---|---|---|
| Pass it on | Add full tariff cost to selling price | Customers pay more |
| Absorb it | Keep prices same, make less profit | Customers pay same, company earns less |
| Split it | Raise prices a little, accept lower profits | Customers pay a bit more, company earns a bit less |
Most companies choose option 1 because they need to stay profitable.
The 2025 U.S. Tariff Changes
In 2025, the United States dramatically increased its tariffs. The average tariff rate jumped from 2.5% to 18.6% by August 2025. This was the highest level since 1934, affecting over $2.3 trillion worth of products.
Timeline of Changes
| Date | Target | New Tariff Rate | Impact on Prices |
|---|---|---|---|
| February 1, 2025 | Canada and Mexico | 25% | Products cost 25% more |
| February 1, 2025 | China | Additional 20% | Chinese products cost 20% more on top of existing tariffs |
| March 4, 2025 | Steel and aluminum from all countries | 50% | Steel and aluminum products cost 50% more |
| April 2, 2025 | Most countries | 10% minimum | Products from most countries cost at least 10% more |
| August 7, 2025 | India | 50% | Indian products cost 50% more |
US-India Trade Before 2025
The United States and India had a big trading relationship worth $129.2 billion in 2024. The US bought $87.3 billion worth of stuff from India, while India bought $41.5 billion worth of stuff from the US.
India sold to America:
| Product Category | Examples |
|---|---|
| Electronics and engineering goods | Computer parts, machinery |
| Jewelry | Gold necklaces, rings |
| Textiles and clothes | Shirts, dresses, fabric |
| Chemicals and medicines | Generic drugs, chemical ingredients |
| Food products | Spices, rice, seafood |
America sold to India:
| Product Category | Examples |
|---|---|
| Oil and energy | Crude oil, natural gas |
| Precious stones | Diamonds for jewelry making |
| Machinery | Industrial equipment, computers |
| Farm products | Soybeans, wheat |
| Defense equipment | Military technology |
How Tariffs Worked Before 2025
| Trade Direction | Average Tariff | Real Example |
|---|---|---|
| Indian products entering US | 3.3% | $100 Indian shirt cost $103 in US stores |
| US products entering India | 17% general, 39% for farm products | $100 iPhone cost $117 in Indian stores, $100 American wheat cost $139 |
Impact of 50% Tariffs on Indian Products
Effects on American Consumers - American families now face what economists call the largest peacetime tax increase in nearly a century. The average American household pays $2,400 more per year because of these tariffs to imported goods on all countries.
| Income Level | Extra Cost Per Year | Why It Hurts More |
|---|---|---|
| Poor families | $1,300 | Spend larger portion of income on imported goods |
| Middle-class families | $2,200 | Balanced impact across spending categories |
| Wealthy families | $5,000 | Higher absolute cost but smaller percentage of income |
Specific Product Price Increases
| Product | Old Price | New Price | Increase |
|---|---|---|---|
| Indian-made shirt | $25 | $37.50 | $12.50 more (50%) |
| Gold necklace from India | $1,000 | $1,500 | $500 more (50%) |
| Indian spices (turmeric, cardamom) | $10 | $15 | $5 more (50%) |
| Smartphone with Indian parts | $500 | $685 | $185 more (37%) |
| Indian leather shoes | $80 | $111 | $31 more (39%) |
Indian Economic Response
India tried several strategies to deal with these tariffs:
| Response Strategy | What India Did | Result |
|---|---|---|
| Energy diplomacy | Bought 120% more oil from US instead of cheaper Russian oil | Indian consumers pay more for gasoline and electricity |
| Trade concessions | Offered to remove tariffs on $23 billion of US products | American products would be cheaper in India |
| Protecting farmers | Refused to change farm and dairy protection rules | Indian farmers keep their jobs but consumers pay more for food |
| Defense retaliation | Paused buying American military equipment | US defense companies lose billions in sales |
Effects on Indian Consumers - Indian consumers face pressure from multiple directions.
| Impact Area | How It Affects Indians | Example |
|---|---|---|
| Energy costs | Government buying expensive US oil instead of cheap Russian oil | Gas and electricity prices go up |
| Currency weakness | Indian rupee loses value | All imported products cost more |
| Potential retaliation | India might add tariffs on US products | iPhones and American goods could cost more |
| Protection from domestic market | Most Indians buy locally-made products | Limited direct impact for daily shopping |
Global Economic Reshaping
Winners and Losers in the US
American Winners:
| Industry | Why They Win | Challenge They Face |
|---|---|---|
| US textile companies | Indian clothes now too expensive for Americans | Need to increase production quickly |
| US steel and aluminum makers | 50% tariffs protect them from competition | Higher costs for companies that use steel and aluminum |
| American jewelry makers | Can compete better against expensive Indian jewelry | Raw materials cost more |
American Losers:
| Group | Why They Lose | Impact |
|---|---|---|
| All consumers | Everything costs more | $2,400 less spending power per household |
| Import-dependent businesses | Higher costs for Indian components and materials | Lower profits, might raise prices |
| Export companies | India buying less American defense equipment | Lost sales and jobs |
New Trade Patterns
Countries are finding new trading partners to avoid high tariffs:
| Country/Region | New Opportunity | Why It Benefits |
|---|---|---|
| Vietnam and Bangladesh | American companies buying textiles there instead of India | More jobs and export income |
| European Union | India focusing more on European markets | Increased trade with India |
| Mexico | American companies moving production there to avoid tariffs | More manufacturing jobs |
| Middle Eastern countries | India increasing trade focus there | New export markets for both sides |
Long-term Changes
These tariffs are changing how the world economy works:
For India: The country is working harder to sell to Europe, Asia, and the Middle East instead of depending so much on America. This means Indian companies are building new relationships and finding new customers.
For America: Companies are looking for alternatives to Indian suppliers, either by bringing production back to America, moving to Mexico, or finding suppliers in other countries.
For Everyone Else: Countries facing high US tariffs are working together more, creating new trade relationships that don't depend as much on the American market.
Key Takeaways
The 2025 tariff changes represent the biggest shift in global trade patterns since World War II. While tariffs are supposed to protect American jobs and industries, they also make everything more expensive for American consumers. At the same time, countries like India are finding new ways to trade with the rest of the world, potentially making the global economy less dependent on the United States in the long run. The real test will be whether American consumers and businesses can adapt to these higher costs, and whether the protection for American industries leads to enough new jobs and economic growth to justify the higher prices everyone has to pay.