For the past few months, the markets have been digesting and trying to make sense of the ever-changing news flow about U.S. tariffs being imposed on trading partners by the Trump administration. So, what is a tariff? Spoiler alert: a tariff is a tax. But it’s also a tool – one with varying effects on inflation, household incomes, trade balances, and financial markets. The question of who pays for the tariffs is slightly more complicated.
Scenario
Let’s start with a simple example: the United States implements 25% tariffs on all goods imported from Japan. A shipping container from Japan with 10,000 units valued at $6 million (landed cost) arrives at a U.S. port. Before taking possession of the product, the importer must pay the $1.5 million tariff to the U.S. government – this demonstrates the use of tariffs as a revenue generating tool. Assuming the importer can afford to pay the tariff, he must now decide: 1) sell the product at the price consumers are currently paying (say $1,000 each) or 2) raise the price up to the amount of the tariff to help cover the cost paid at the port (up to $1,150 each).
If the importer chooses option 1 to absorb the tariff, his gross profit margin will be significantly impaired by the amount of the tariff paid. Playing out the math in this example, it would reduce the importers’ gross margin to 25%, down from 40%. This is clearly not an ideal situation for any business whose goal is to maximize profit.
If the importer chooses option 2 to pass along the cost of the tariff to consumers and preserve his higher margin, it means the retail price you pay will be 15% higher; in other words, you will pay $150 more today than you would have yesterday for the exact same product. Now you must make a choice: how badly do you want this product and is it worth the higher price? While you might decide it is, many consumers will decide it isn’t worth the new price, and they will skip the purchase.
For a non-U.S. company that manufactures product in Japan, it may be the goal of the administration for consumers to forego that purchase in favor of a substitute item made in the United States that is now comparably cheaper than its foreign-made competitor. This could ultimately harm Japan’s economy and force its government to reconsider certain policies that may please the U.S. administration in other ways – this demonstrates the use of tariffs as a foreign policy tool. However, consider the U.S.-based company that manufactures products in Japan because it’s the only place that has such specialized manufacturing capabilities. Consider also that this U.S.-based company employs hundreds of people in a local American town. The potential cost of the tariff, when passed through to the consumer, could do considerable damage to the company and to the local economy it supports if sales volumes drop. As a last resort, the company may try to find a U.S.-based manufacturer to avoid the tariff – this demonstrates the use of tariffs as a protectionism tool. But this could take a long time and likely wouldn’t be cheaper in the long run as U.S. manufacturing tends to be more expensive. And experts warn that broad tariffs risk other unintended consequences such as higher input costs (labor, materials), supply chain disruptions (a la the Covid pandemic), and slower economic growth, all with little to no guaranteed job creation.
Impact
This simplified scenario highlights that tariffs are complicated, and the knock-on effects may not be clear for years to come. There is a complex decision tree for business managers to navigate as they move forward in such an uncertain environment.
Those who suffer the most devastating consequences are disproportionately 1) the consumer and 2) small businesses that lack the flexibility, resources, and cash flow to survive the short term. In the scenario provided above, few companies, except perhaps the largest and most capitalized corporations, could afford to pay an additional $1.5 million to take delivery of the product before making a single sale. For many smallto medium-sized companies, the cost of doing business just skyrocketed and cash flow will become a huge constraint.
A July 2025 analysis by JPMorgan estimates tariffs could cost mid-sized U.S. firms roughly $82 billion. With an estimated 50-60% passthrough to consumers, firms will likely see tighter margins, reduced hiring, and less reinvestment. The overall result is less competition, smaller selection for consumers, reduced entrepreneurialism, stifled innovation, increased consolidation, and – ultimately – a weaker consumer environment that benefits big corporations, damages small business, and hurts American workers.
Markets
The stock market’s reaction to tariff announcements is telling and highlights that investors (in the broadest sense) believe the short- to medium-term effects of the tariff policy on the overall market and the economy skew more negative than positive. While the U.S. government may benefit from new revenue to help offset tax breaks in the recently enacted “Big Beautiful Bill,” that does little to support American businesses.
Estimates from Goldman Sachs suggest that every five-percentage point step in the U.S. tariff rate could reduce corporate EPS (earnings per share) by 1-2% across the S&P 500. This translates to softer corporate profits and greater uncertainty around forward earnings guidance. In the first-quarter earnings report Ford Motor Company (NYSE: F) CEO Jim Farley said the company suspended its annual guidance, citing $1.5 billion of EBIT (earnings before interest and taxes) pressure from tariffs.
Stock market reactions have been mixed but generally cautious: the S&P 500 often dips on tariff announcements, most notably in the days following “Liberation Day” when the S&P 500 fell 12%. Market projections from Wall Street equity strategists remain cautious but not dire, thanks in part to the likelihood of “earlier and deeper Fed easing”.
While some analysts anticipate market resilience, supported by Fed rate cuts, strong earnings, and stock buybacks, others warn that the combination of inflation, policy unpredictability, and supply-chain challenges pose a notable stagflation risk.
Target Corporation (NYSE: TGT) CEO Brian Cornell recently called out five consecutive months of declining consumer confidence and said the company is in an “exceptionally challenging environment”. While he noted that “[increasing] price is the very last resort”, the company’s stock is down nearly 25% year-to-date and management recently cut the full-year profit guidance.
Final Thoughts
Tariffs are strategic levers that impact households, businesses, supply chains, markets, and central banking policy. While they can be wielded as tools of revenue generation, foreign policy, and protectionism, their intended benefits are often in conflict with macroeconomic health.
From a market perspective, our takeaway is clear: higher tariffs and sustained policy uncertainty is likely to pressure corporate earnings and drive inflation, squeezing equity valuations and perpetuating unnecessary market volatility. While large caps may be best suited to endure, smaller firms and trade-sensitive sectors are likely most vulnerable.
Clay Crumbliss, CFA
July 22, 2025
About the Author
Clay Crumbliss, CFA is a portfolio manager and research analyst with Barnett & Company, based in Chattanooga, TN Clay spent a decade working as an institutional equity research analyst at Credit Suisse and Guggenheim Securities in New York, NY Prior to Barnett & Co., he advised management teams on investor relations and pre-IPO strategy. He began his career in investment banking and mergers & acquisitions.
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