If you’re like me, you’ve probably wondered lately just how tariffs work and how they actually impact prices. A 25% tariff doesn’t necessarily mean a 25% increase in final cost to consumer, after all (in fact, it can be much higher than the imposed tariffs because of increases over the supply chain—more in that in a minute. Truth is, ever since President Trump made it clear that tariffs would be central to his economic agenda—and because nearly every financial expert agrees that tariffs are bad for consumers, economies, and foreign relations—it’s worth attempting to understand just how they actually work.
Let’s do this through the example of an avocado. (And please note that this example is purely hypothetical; actual prices and markups will vary depending on farmer costs and individual company markups.)
Here’s the infographic explanation:
There are several things to note when studying the graphic:
- Tariffs are imposed early in the supply chain: Tariffs are usually charged upon import, charged to the company importing the avocado into the United States.
- Initial tariffs may seem small at first, but that’s misleading. Because the tariff is imposed before the avocado enters the supply chain, the cost increase is on a product at its earliest (and least expensive stage).
- Because tariffs affect the base price early, prices increase higher than through a supply chain with no tariff. As the avocado moves through the supply chain—to national and regional distributors, to wholesalers, and eventually to local supermarkets—each markup increasingly makes the avocado cost more.
Let’s walk through how this works.
Step 1: The Avocado’s Journey Begins
Every avocado starts on a farm, usually in a region like Michoacán, Mexico. A farmer grows, harvests, and sells that avocado for about $0.30. From there, it begins a journey through a series of businesses — each adding their own costs and markups.
That’s what the supply chain is: a network of people and businesses that move the product from the farm to your grocery store.
Step 2: The No-Tariff Scenario (Normal Trade)
Let’s say there’s no tariff — just the normal costs of doing business. Here’s how the price adds up:
- Exporter (in Mexico) buys from the farmer at $0.30
- Adds $0.12 for packing, sorting, cold storage
- Adds a small profit margin
- Sells to U.S. importer for $0.48
- Importer (in the U.S.)
- Pays $0.48 for the avocado
- Adds $0.12 for shipping, warehouse handling, inspection
- Adds markup to make a profit (25%)
- Sells to national distributor for $0.75
- National Distributor
- Adds costs for managing logistics across the country
- Adds markup (25%)
- Sells to regional distributor for $0.94
- Regional Distributor
- Adds markup (25%)
- Sells to wholesaler for $1.13
- Wholesaler
- Adds markup (25%)
- Sells to retailer for $1.46
- Retailer
- Adds store expenses and markup (25%)
- Final price to consumer: $1.82
Step 3: What Happens When a Tariff Is Added?
Now let’s say a 25% tariff is imposed on the avocados. That means the U.S. importer now has to pay an extra fee of $0.12 (25% tariff) on top of the $0.48 price.
That may not sound like much — but that’s where it gets misleading: each business in the supply chain adds their markup on top of the new, higher cost creating a price increase ripple effect.
Here’s what that looks like:
- Importer
- Now pays $0.48 + $0.12 tariff = $0.60
- Adds shipping and storage costs
- Adds markup (25%)
- Sells to national distributor for $0.90
- National Distributor
- Adds markup (25%)
- Sells to regional distributor for $1.13
- Regional Distributor
- Adds markup (25%)
- Sells to wholesaler for $1.41
- Wholesaler
- Adds markup (25%)
- Sells to retailer for $1.76
- Retailer
- Adds final markup (25%)
- Final price to consumer: $2.20
What’s the Difference?
| Scenario | Final Price |
|---|---|
| Without Tariff | $1.82 |
| With Tariff | $2.20 |
| Price Increase | $0.38 |
The tariff itself is only $0.12, but because each business adds a percentage-based markup, that cost grows at every step. It’s like a snowball rolling downhill — it gets bigger the farther it goes. Tariffs are often used by governments to encourage buying domestic goods or to influence international trade. But the actual cost of a tariff is usually passed on to consumers — you and me. In the case of avocados, the price increases well beyond the tariff amount due to how the supply chain works.
Are Tariffs Harmful or Helpful?
The debate has been ongoing for decades, but interestingly, most economists, policymakers, and business leaders have widely agreed: tariffs are more harmful than helpful. Tariffs raise prices for consumers and they often hurt more workers than they help. Tariffs disrupt supply chains for businesses and create uncertainty around product development and products need to import. They also often create retaliation from other countries, further disrupting businesses and harming employees of those companies and the end consumers.
It’s true that tariffs have the potential to temporarily protect certain domestic industries (like steel or solar panels) an they can give political leverage in negotiations. However, these benefits often come at the expense of higher costs elsewhere and the greatest pains are typically felt at home, by the consumer, who is now paying nearly $0.40 more for every avocado (not to mention every other product affected by tariffs!)