01How a tariff is applied
A tariff (or customs duty) is a tax charged when goods enter a customs territory. In the European Union the rates are set in the Common Customs Tariff and published in the TARIC database. In the United States they are in the Harmonized Tariff Schedule. Three things determine what you pay:
- The classification. Every product has a Harmonized System (HS) code. The first six digits are common worldwide; the EU and the US add more digits for their own rates. A wrong code means a wrong rate.
- The origin. The rate depends on where the goods are considered to originate, not where they were shipped from. Free trade agreements give lower or zero rates for goods that meet their rules of origin.
- The customs value. In the EU, duty is charged on the CIF value: the price of the goods plus freight and insurance to the EU border. The US uses the FOB value, which excludes international freight. Our landed cost guide explains the difference.
Most tariffs are ad valorem, a percentage of the customs value. Some are specific (an amount per kilo or per unit) and some combine the two. Anti-dumping and countervailing duties can be added on top for specific products and countries.
02The direct effect on unit cost
Start with the inputs you import yourself. If a component worth €10 per unit is imported and becomes subject to a 25% tariff, its cost rises by €2.50, plus the duty on the freight portion where the CIF rule applies. What matters for the margin is how big that component is relative to the total unit cost.
Extra cost per unit = unit cost × imported share × tariff rate New margin % = (new price − new cost) / new price
A product with a unit cost of €70, of which 40% is imported, faces a cost increase of €7 under a 25% tariff: 10% of the unit cost, not 25%. On a €100 selling price, gross margin falls from 30% to 23% if nothing is passed on. Try your own numbers:
Simplified: assumes the tariff applies to the customs value of the imported share and that volumes do not change.
03The indirect effect through suppliers
Your domestic suppliers also import. A European steel processor buying Chinese or Indian steel faces the same tariff and will raise its prices to you, usually with a delay of one or two contract cycles. These indirect effects are easy to miss because they arrive as ordinary price increases from suppliers in your own country.
To estimate them, look at the sector of each major supplier and at how much that sector imports from the affected country. Input-output tables such as the OECD Inter-Country Input-Output database provide exactly this: for each sector and country, the share of inputs bought from every other sector and country. In practice, for most manufacturers the indirect effect is smaller than the direct one but not negligible, and in metal-intensive sectors it can be the larger of the two.
04The effect on your exports
Tariffs are often retaliatory. When one country raises tariffs, its trading partners frequently respond on a list of products chosen for political impact. In 2018 the EU responded to the US steel and aluminium tariffs with duties on US products such as motorcycles, whiskey and orange juice. If you export, check whether your products appear on proposed retaliation lists, which are usually published for consultation before they take effect.
On exports the question is not your cost but your price competitiveness: a 15% tariff on your goods in the US market either reduces your margin, if you absorb it, or your volumes, if your importer raises the shelf price.
05Who really pays: pass-through
Pass-through is the share of the tariff that ends up in the price paid by the buyer. Two well-known studies of the US tariffs of 2018 and 2019, by Amiti, Redding and Weinstein and by Fajgelbaum and co-authors, found that US import prices rose by close to the full amount of the tariffs. Foreign exporters did not cut their prices much; US importers paid the duty.
For your own pricing, the question is how much of your extra cost your customers will accept. It depends on:
| Factor | Pass-through is easier when… |
|---|---|
| Competitors' exposure | Competitors import from the same countries and face the same tariff |
| Product differentiation | Your product is hard to substitute |
| Contract terms | Contracts include cost-indexation or tariff clauses |
| Share of the customer's cost | Your product is a small part of what your customer buys |
| Market conditions | Demand is strong and capacity is tight |
A useful exercise is to compute the price increase needed to keep your margin percentage unchanged, then compare it with what your competitors are likely to do. The calculator above shows that figure.
06Ways to reduce the cost of a tariff
- Check the classification. Similar products can fall under different HS codes with different rates. Binding Tariff Information (BTI) in the EU gives a legally binding classification.
- Use preferential origin. If a free trade agreement covers the supplier's country, goods that meet the rules of origin may enter at a lower or zero rate. The supplier must provide proof of origin.
- Inward processing and customs warehousing. In the EU, goods imported to be processed and re-exported can be relieved from duty under the inward processing procedure.
- Duty suspensions. The EU suspends duties on some inputs that are not available in sufficient quantity in the EU. The list is reviewed regularly.
- Change the country of origin. Moving sourcing to a non-affected country can remove the tariff, but substantial transformation rules decide origin, so simply routing goods through a third country does not.
- Renegotiate Incoterms and prices. Share the cost with the supplier, especially where the supplier is keen to keep volume.
Each option has a cost and a lead time. Compare them on the same scenario: a stress test with the tariff, and the same stress test with each response applied.
07A worked example
A furniture manufacturer sells a chair for €180. Its unit cost is €110: €45 of steel frames imported from outside the EU, €25 of fabric from an EU supplier, €40 of labour and overhead. A new 25% tariff applies to the steel frames.
| Item | Before | After |
|---|---|---|
| Imported steel frames (CIF) | €45.00 | €45.00 |
| Duty at 25% | €0 | €11.25 |
| Indirect increase on EU fabric (estimate) | €0 | €0.50 |
| Unit cost | €110.00 | €121.75 |
| Gross margin at €180 | 38.9% | 32.4% |
| Price to keep 38.9% margin | €199.23 |
If the competitors source frames in the EU and face no tariff, a 10.7% price increase is unlikely to stick. The more realistic options are to qualify an EU or preferential-origin frame supplier, or to pass on part of the increase and accept a lower margin while the switch happens.
FAQFrequently asked questions
How do I calculate the impact of a tariff on my product?
Multiply the customs value of the imported inputs in one unit by the tariff rate to get the extra cost per unit, then recompute your margin at the current price. Add an estimate of indirect increases from domestic suppliers who import the same goods.
Is the tariff charged on the price I pay the supplier?
It is charged on the customs value. In the EU that is the CIF value, which includes international freight and insurance to the border. In the US it is the transaction value excluding international freight.
Who pays a tariff, the exporter or the importer?
The importer of record pays the duty to customs. Studies of recent US tariffs found that foreign exporters lowered their prices only slightly, so most of the cost was borne by importers and their customers.
How much of a tariff can I pass on to customers?
It depends mostly on whether your competitors face the same tariff, how differentiated your product is, and your contract terms. Compute the price that keeps your margin unchanged and compare it with competitors' likely prices.
How can I reduce tariffs legally?
Check the HS classification, use preferential origin under free trade agreements, apply for duty relief procedures such as inward processing, use duty suspensions where available, or shift sourcing to countries not affected by the tariff.