Tariffs as a Hidden Tax: Price Pass-Through in Multi-Stage Supply Chains

Abstract

Problem definition: A commonly held belief is that tariffs on imports are directly reflected in consumer prices. However, in complex multi-stage supply chains, the actual consumer-price impact of a tariff can be diluted. This article examines how import tariffs propagate through a multi-stage supply chain and why the resulting consumer price increases are typically much smaller than the headline tariff rate. We focus on the U.S. pharmaceutical supply chain as a case in point, due to its heavy reliance on imported inputs and multiple intermediary markups.

Methodology/results: We develop a tariff impact calculator to model cost build-up, markup, and partial cost absorption at each stage of the supply chain. Our analysis shows that even a substantial tariff (e.g., 25%) on an Active Pharmaceutical Ingredient (API) leads to only a minor uptick (often around 1% or less) in the final retail price of the drug. Furthermore, we find that the government’s gross tariff revenues are substantially offset by reduced corporate tax receipts and higher procurement costs for public healthcare programs. We derive a simple condition under which government net receipts from tariffs can turn negative.

Managerial implications: Our discussions highlight why tariff-induced price shocks may be smaller than commonly feared, and why firms in multi-stage supply chains often opt to absorb a portion of cost increases rather than fully passing them on. For supply chain managers, understanding the muted consumer-price impact allows for better pricing and sourcing strategies during periods of trade protectionism. For policymakers, the results caution that tariffs may fail to achieve their intended objectives—such as making reshoring more competitive or raising net government revenue.

Keywords: Tariffs, supply chains, price pass-through, pharmaceutical industry

JEL Classification: F13, L11, L81, H25, I18