Trump Tariffs 2.0: Who Pays When Businesses Stop Absorbing? 

The average effective tariff rate on US imports is now 13.5%, the highest since 1946 (Tax Foundation, February 2026). Before Trump took office in January 2025, the rate was 2.4% (Yale Budget Lab, 2025). In one year, tariffs on imported goods have more than quintupled. The US government collected $187 billion more in tariff revenue in 2025 than it did in 2024, a nearly 200% increase (CNN, January 2026).

The White House says foreign countries are paying for this. The data says otherwise. According to a February 2026 report from the New York Federal Reserve, roughly 90% of tariff costs have been borne by American consumers and businesses, not foreign exporters (Fortune, February 2026). The Kiel Institute found the foreign share was even lower - just 4% (Fortune, February 2026).

So where is the money actually coming from? And what happens now that businesses are running out of room to absorb the costs?

How 2025 Worked: Businesses Took the Hit

For most of 2025, American companies chose to eat the tariff costs rather than pass them to customers. JPMorgan estimated that businesses footed roughly 80% of the tariff bill last year (CNN, January 2026). That is why consumer price inflation stayed fairly contained even as tariffs surged - the costs were being hidden inside corporate profit margins rather than showing up on price tags.

Goldman Sachs broke down the split more carefully. By August 2025, US businesses were absorbing 51% of tariff costs. Consumers were paying 37%. Foreign exporters were covering just 9%, with about 3% attributed to tariff evasion (Fox Business, October 2025). Goldman estimated that tariffs added half a percentage point to inflation in 2025, roughly in line with what Fed Chair Jerome Powell said publicly (CNN, January 2026).

This worked for a while because companies had margin to spare. After years of pandemic-era pricing power and strong consumer demand, many businesses entered 2025 with healthy profit margins. They could absorb a few percentage points of tariff costs without going into the red. But that buffer has a limit, and most companies have now reached it.

2026: The Pass-Through Begins

JPMorgan's key prediction for 2026 is that the 80/20 split flips. Instead of businesses absorbing 80% of tariff costs, consumers will start absorbing 80% (CNN, January 2026). Goldman Sachs projects that the consumer share will reach 55-70% by the end of 2026 (Fox Business, October 2025; The Fulcrum, January 2026).

The evidence is already showing up. Procter & Gamble announced in July 2025 that it would raise prices on household products including nappies and skincare because of tariffs. General Motors reported a $1.1 billion profit hit in the same month (Fortune, February 2026). Kyle Peacock, principal at Peacock Tariff Consulting, told CNN that "a lot of our clients really didn't want to pass the costs on, but now they're really having to." Many businesses started raising prices at the beginning of 2026, with others planning increases in Q1 and Q2 (CNN, January 2026).

Harvard Business School professor Alberto Cavallo, who runs a live Tariff Tracker, found that through October 2025, tariffs had already added 0.76% to the Consumer Price Index. Imported goods prices were up about 5% since March 2025, while domestic goods were up 2.5%. If measured against the pre-tariff deflationary trends of 2024, the impact is larger: imported goods up 6.6%, domestic goods up 3.8% (Harvard Business School, October 2025).

The Tax Foundation calculated that per US household, tariffs will amount to an average tax increase of $1,300 in 2026 - up from $1,000 in 2025. For context, the Tax Foundation previously estimated that Trump's 2025 tax cut increased the average household return by $1,000. The tariff burden has already wiped out the tax cut and then some (Tax Foundation, February 2026; Fortune, February 2026).

The Supreme Court Wild Card

As of this week, the US Supreme Court is reviewing whether Trump's most sweeping tariffs - those imposed under the International Emergency Economic Powers Act (IEEPA) - are legal. IEEPA is a 1970s law that was designed for national emergencies and never uses the word "tariff." The Trump administration used it to impose tariffs on nearly every major trading partner, and those IEEPA tariffs account for roughly half of all import taxes currently being collected each month (NPR, February 2026).

If the Court rules against the administration, businesses could be entitled to refunds on tariffs already paid. JP Morgan estimates that IEEPA measures account for about 61% of the year-to-date increase in US tariffs, or roughly $180 billion on an annualised basis (JP Morgan, 2026). A ruling striking down IEEPA tariffs would be a major shock to the system - in a good way for consumers and businesses, but a bad way for the government's revenue projections.

However, even if IEEPA tariffs are struck down, the administration has backup options. Section 122 of the Trade Act allows the president to maintain 15% tariffs for 150 days without Congressional approval. And Trump has already shown a willingness to find new legal pathways when old ones get blocked.

The practical result for businesses is more uncertainty, not less. Many companies have told consultants they are waiting for the Supreme Court decision before finalising their 2026 pricing strategies (CNN, January 2026). That means a wave of price increases could come all at once depending on the ruling, rather than gradually over the year.

The Manufacturing Contradiction

One of the stated goals of tariffs was to bring manufacturing back to the US. The data so far shows the opposite. US factories shed 108,000 jobs in 2025 (NPR, February 2026). The Institute for Supply Management's manufacturing survey has shown contraction for most of the past year. One factory manager told the ISM in December that "morale is very low across manufacturing in general" (NPR, February 2026).

The logic behind manufacturing tariffs makes sense in theory: make imports more expensive, and domestic production becomes competitive. But in practice, most US manufacturers rely on imported components. A car assembled in Michigan uses parts from Mexico, Canada, Japan, and Germany. Tariffs on those parts raise the cost of making the car in America, not just the cost of importing a finished car from abroad. The Fed's Beige Book has reported throughout 2025 that manufacturers are complaining about tariffs hurting their businesses more than helping them, with some firms shifting investment away from productivity improvements toward tariff cost management (Equitable Growth, January 2026).

Small and medium-sized businesses have been hit hardest. Larger companies can spread tariff costs across global supply chains, negotiate with suppliers, or absorb losses temporarily. Smaller businesses do not have that flexibility. A survey cited by The Fulcrum found that small and medium businesses saw their effective tariff payments double from 6.5% in January to 11.4% by July 2025, with expectations of 25% rates ahead (The Fulcrum, January 2026).

What This Means for Markets, the Fed, and the UK

Tariffs create a difficult problem for the Federal Reserve. They push prices up (inflationary) while hurting economic growth (deflationary). The Fed cannot cut rates to support growth without risking higher inflation, and it cannot raise rates to fight inflation without further slowing the economy. This is the definition of stagflation risk.

Goldman Sachs estimated core PCE inflation at 3.0% year-over-year in December 2025, of which 0.8 percentage points came from tariffs. Their projection for December 2026 is 2.4% core PCE, or 2.0% net of tariff effects (Fox Business, October 2025). In other words, without tariffs, inflation would already be at the Fed's 2% target. Tariffs are the single biggest reason it is not.

The Fed cut rates by 25 basis points in September 2025, but has been cautious since then. If tariff-driven inflation stays sticky through 2026, the market's expectation of further rate cuts may not come through. That matters for equities, for housing, and for anyone carrying variable-rate debt.

For UK markets, the impact is indirect but real. Trump imposed new tariff rates on 14 countries as of August 2025, and the EU has faced rates of up to 30% (JP Morgan, 2026). The UK has so far avoided the worst of it, but any goods routed through countries with higher tariff rates get caught in the crossfire. More importantly, US tariffs slow global trade volumes, which hurts UK exporters. And if US inflation stays elevated because of tariffs, the Fed keeps rates higher for longer, which strengthens the dollar against the pound and puts pressure on the Bank of England's own rate decisions.

The sector impacts within the US are also uneven. Grocers, which operate on thin margins of 1-3%, have almost no room to absorb tariff costs and are passing them straight through. Coffee prices have jumped because the US imports most of its supply from Brazil and Colombia, both hit by tariffs. Electronics and clothing are next - retailers have been pruning product variety rather than raising prices across the board, which means consumers get fewer choices even when headline prices do not change much (CNN, January 2026; Harvard Business School, October 2025).

The Bottom Line

Tariffs are a tax. The question was always who would pay it. For most of 2025, businesses absorbed the cost, and consumers barely noticed. That is changing. As businesses run out of margin, prices are going up on everything from groceries to cars to household goods. The average American household is now paying more in tariff costs than they gained from the 2025 tax cut.

The Supreme Court could change the picture. But even if IEEPA tariffs get struck down, the effective tariff rate is unlikely to return to pre-2025 levels. The trade policy shift is structural, not temporary. Companies need to plan for a world where the cost of importing goods is permanently higher than it was two years ago. Consumers need to understand that when the government raises tariffs, the bill arrives at their door - just with a delay.