In today’s global economy, understanding the impact of import duties is no longer a matter of simple arithmetic. Tariff increases don’t just add an extra line to the cost sheet, they reshape business dynamics across the supply chain, from overseas producers to end consumers.
Let’s consider a typical example: importing €50,000 worth of goods from Europe into the United States. Assuming a fixed EUR/USD exchange rate of 1.20, the import value translates to $60,000. On top of this, we add logistical, insurance, warehousing, and customs clearance costs, simplified here to $37,000. This setup provides a baseline for two scenarios: a 5% import duty versus a 15% duty.
| datas expressed in $ | 1st August 2025 backward | 1st August 2025 onward | change C% – B% |
| raw materials | 60.000 | 60.000 | – |
| 5% tariffs | 3.000 | – | |
| 15% tariffs | 9.000 | – | |
| service charges | 37.000 | 37.000 | – |
| total cost (importer) | 100.000 | 106.000 | 6,00% |
Although the numerical difference in duties is just $6,000, the economic impact is far greater — it affects long-term competitiveness. This article overlook the deeper economic challenges behind these changes, showing how even small policy shifts can create much bigger risks for importers and retailers over time.
From duties to business risk: who absorbs the cost?
Under a 5% duty, the total landed cost amounts to $100,000. At a 100% markup, the selling price would be $200,000, yielding a gross margin of 100%.
When duties rise to 15%, the total cost increases to $106,000. If the selling price remains unchanged, the gross margin drops to 94%.
Scenario 1 – consumer absorbs tariffs
| datas expressed in $ | 1st August 2025 backward | 1st August 2025 onward | change C% – B% |
| raw materials | 60.000 | 60.000 | – |
| 5% tariff | 3.000 | – | |
| 15% tariff | 9.000 | – | |
| service charges | 37.000 | 37.000 | – |
| total cost (importer) | 100.000 | 106.000 | 6,00% |
| 100% margin | 100.000 | 106.000 | 6,00% |
| total cost (retail) | 200.000 | 212.000 | 12,00% |
Scenario 2 – producer absorb tariffs
| datas expressed in $ | 1st August 2025 backward | 1st August 2025 onward | change C% – B% |
| raw materials | 60.000 | 60.000 | – |
| 5% tariffs | 3.000 | – | |
| 15% tariffs | 9.000 | – | |
| service charges | 37.000 | 37.000 | – |
| total cost (importer) | 100.000 | 106.000 | 6,00% |
| margin | 100.000 | 94.000 | – 6,00% |
| total cost (retail) | 200.000 | 200.000 | – |
This scenario presents a simple yet fundamental dilemma: either raise the price and risk losing competitiveness, or maintain the price and reduce profitability. In economic terms, this is known as the tax incidence: who ultimately bears the burden of a policy shift.
Source: ScienceDirect – Tax Incidence
While a one-time margin drop might be absorbed operationally, repeated increases in trade barriers could lead either to long-term margin erosion or higher consumer prices.
In highly competitive markets, even minor margin compressions compound over time.
Financial leverage and the real cost of capital
Most realistic import cost models overlook a critical dimension: working capital requirements increase when landed costs rise. Moving from $100,000 to $106,000 per container means additional funds must be tied up in inventory. For companies operating on thin margins, this is not a minor adjustment, it’s a strategic constraint.
Many well-capitalized in import-export sectors (e.g. retail) intentionally operate with financial leverage, where debt financing is cheaper than the return on invested capital. This practice maximizes ROE (Return on Equity), assuming favorable interest rates and stable operating returns.
Leveraging capital also means that any increase in cost.
Even $6,000 per container becomes more than just a line item. It directly impacts financing needs and risk exposure. Whether the capital comes from debt or internal reserves, the cost is real and quantifiable.
ROI > Cost of Debt → ROE increases with leverage
Even if a business has cash reserves, those funds carry an opportunity cost. That $6,000 could be reinvested in in other operating or financing activities.
Capital, in any form, is never free.
Retail price elasticity and the problem of competitive convergence
Retail is one of the most price-sensitive and competitive sectors in global commerce. It is often characterized by low entry barriers, especially in e-commerce, and high price transparency. Consumers can easily compare offerings, and loyalty is frequently linked to price points rather than brand differentiation.
In this environment, price elasticity of demand is high. Even a 3–5% price increase may cause a significant drop in volume. When duties rise, not all competitors react equally. Some may absorb the cost internally; others may partially pass it on. As a result, the pricing gap between competitors narrows, not because competition disappears, but because reaction asymmetry erodes price-based advantages.
Aiming to maintain competitiveness, absorbing duty costs becomes not only a financial issue but a competitive imperative.
Exchange Rate Volatility and Purchasing Power Risk
The assumption of a fixed EUR/USD exchange rate of 1.20 simplifies analysis but does not reflect market reality. Currency markets are inherently volatile and driven by multiple macroeconomic variables, one of these interest rate differentials itself.
Even a minor shift in the exchange rate, such as a drop from 1.20 to 1.20-x, implies a y% increase in the dollar cost of the same goods. For importers, this means higher expenditures in domestic currency, directly reducing their purchasing power.
y = EUR × 1.20 – x
1.20 = initial EUR/USD exchange rate
x = change in the exchange rate
y = new cost in USD after exchange rate change
EUR = price of goods in euros
Moreover, volatility in the exchange rate complicates contract stability. Unlike duties, which are policy-driven and transparent, currency risks are unpredictable and often harder to hedge in long-tail supply chains.
Logistical Costs Are Not Truly Fixed
In the illustrative example, logistics and related service costs are held constant at $37,000. This is done for clarity, but it’s important to note that these costs are not stable in reality.
Just being informative, between 2020 and 2023, global freight rates experienced unprecedented volatility. According to reports, container shipping costs on key increased by over 200% at some points. Assuming fixed service costs helps isolate the effect of import duties, but from a business planning perspective, logistics should be treated as a dynamic variable, with cost fluctuations that can often surpass the impact of tariffs themselves.
Final Thoughts: It’s Not Just About Price — It’s About Control
While the import duty increase appears modest in isolation, its ripple effects are significant. When combined with financial leverage, retail pricing pressure, currency volatility, and fluctuating logistics costs, the cumulative burden can reshape business viability.
A 3% drop in gross margin may seem acceptable. But if that drop is paired with z% higher logistics costs, y% currency loss, and reduced pricing power, the net profitability of the transaction may fall below sustainability thresholds. And unlike a visible tariff, these costs compound quietly — often undetected until the damage is systemic.
The real threat is not the duty itself. It is the absence of analytical control — the failure to anticipate, model, and monitor key economic variables.
If even strong economic blocs seem to be adapting rather than pushing back on trade pressure, how can individual businesses navigate these shifts without clear support or direction?
And in a broader context, inflation remains high. Monetary policy, in theory, should tighten — but decisions rarely occur in isolation. What if political influence reshapes central bank priorities? If interest rates stay high or move unpredictably, how might capital shift, currencies react, or debt burdens grow? In a world this interconnected, even local choices can trigger global consequences, and it’s not always clear where the strain will surface first.
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