The general claim in support of tariffs is that they make foreign companies pay for access to the US market, protecting domestic industry. However, because many US-based firms operate abroad as well, tariffs can fall on American business activity more frequently than is commonly assumed. We estimate that about half of the tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. base is related-party trade—i.e., trade between affiliated firms within the same multinational company. Tariffs on this activity raise costs for US production and manufacturing and act like a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on the US production network.
Studies have repeatedly shown that US businesses and consumers are bearing a disproportionate share of the tariff burden, despite the administration’s claims that foreigners would pay. While some evidence indicates foreigners may bear a larger share than initial studies suggested, the way that modern production is organized introduces another wrinkle to the analysis.
Trade Between Related Parties
The cost effect of tariffs is especially impactful because a large share of US imports occur between related parties. This includes transactions between US parent companies and their affiliates abroad as well as US-based subsidiaries of foreign-owned parent companies, both of which contribute to US employment and domestic investment.
Data from the Census Bureau on related-party trade shows that about half of US goods imports in 2024—49.5 percent—came from related parties. The share has remained consistent over the past two decades, ranging from 46 to 51 percent of total imports since 2005, with low points during the pandemic and the 2008 recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years..
Related-party trade is not an accident of corporate organization. Multinational firms locate and operate different stages of production where they can be carried out most efficiently due to factors like specialized labor, access to raw materials, or proximity to suppliers or customers. US manufacturers then rely on these imported parts, materials, and equipment from around the world to support production and jobs at home. Most imports are intermediate and capital goods that support, rather than replace, domestic production. When tariffs are applied to these imports, they raise costs of inputs for businesses based in the US.
We might generally think of tariffs as applying to transactions between independent foreign firms and US firms, but the high and stable rate of related-party imports illustrates that tariffs also apply to transactions within multinational enterprises. As a result, tariffs often function like a tax on global supply chains used by US-based businesses, whether foreign-owned or US-owned, increasing production costs for domestic operations rather than solely burdening foreign producers.
Tariffing Related Parties
The high proportion of related-party imports to the US has implications for who is paying the tariffs, and how they impact the domestic economy. Even considering exemptions of specific goods, we estimate that 45.6 percent of the current tariff base is imports between related parties. In some sectors, such as autos and pharmaceuticals imports, the share of related-party trade rises above 80 percent.
Table 1. Related-Party Import Share for Goods by Sector and Tariff Applicability
| Total related party trade share | Related party trade subject to current tariffs share | |
|---|---|---|
| Auto Imports | 96.8% | 97.1% |
| Pharmaceutical Imports | 85.5% | 84.5% |
| Metals Imports | 34.0% | 34.0% |
| All Other Imports | 42.4% | 38.0% |
Enacting tariffs on foreign parent companies may sound like shifting the burden onto a foreign company. But this can in turn impact operations of US subsidiaries, hurting domestic job growth and investment. For example, a Japanese automaker may operate a plant in the US to manufacture cars for the North American market, adding to investment and employment in the US. Tariffs would increase the cost of operating the plant, incentivizing a shift away from manufacturing in the US, and potentially harming US job growth and investment despite the parent company being a foreign entity.
Thus, the argument that tariffs tax foreigners is significantly undercut by the large share of within-firm trade and its impacts on the domestic economy.
While specific exemptions in many of the implemented tariffs reduced exposure for some domestic businesses, the need for exemptions itself reveals the challenge of imposing broad tariffs in an economy characterized by complex supply chains and extensive related-party trade. The large list of exemptions for the “baseline” tariffs suggests the Trump administration recognizes that broad-based tariffs would raise costs for domestic manufacturers rather than protect them.
The Negative Impact of Related-Party Tariffs on US businesses
Tariffs on related-party trade raise costs for the multinational production networks that businesses have spent years building to maximize efficiency and productivity. These structures often reflect long-term investments in facilities, worker training, and logistics, and are not easily reconfigured in response to tariff changes. The immediate effect is higher costs for businesses operating within those networks. Any long-term changes, such as reshoring or shifting supply chains, tend to reduce efficiency by optimizing to reduce tariff exposure rather than to improve productivity.
While the Census data does not distinguish between imports from US companies’ overseas operations and foreign-owned parent companies, some of what is thought of as imports from foreign companies is actually imports from American-owned affiliates. When the importer and exporter are related, the typical distinction of whether the importer or the exporter will eat the cost collapses. Even in cases where the related-party trade is between a foreign parent company and a US subsidiary, these increased costs have implications for employment and investment for the portion of business carried out in the US.
The bottom line is that tariffs raise costs for multinational firms, increasing pressure to raise prices for US consumers or reduce costs by slowing hiring and expansions. These pricing and efficiency issues also lead to reduced competitiveness abroad. Tariffs on inputs for goods produced in the US mean they must either be sold for a higher price when exported to foreign markets, or sold with a lower profit margin. This makes it difficult for tariffed goods produced in the US to compete with the lower-cost supply chains that forgo the US altogether.
The negative effects are compounded by policy uncertainty. With tariff rates changing over 50 times since March 2025, businesses are left unable to make long-term decisions integral to the operations of a multinational company. As uncertainty persists, businesses are more likely to delay or withhold investment or hiring to weather the unknown trade policy ahead.
Conclusion
The argument that tariffs tax foreigners is weakened when nearly half the tariff base is intra-firm trade whose costs flow through US-based production. By raising the cost of intermediate goods, tariffs increase the cost of capital and weaken the incentive for businesses to invest. They also encourage costly supply chain reorganization, as businesses seek a lower tariff burden. These costs drive prices higher, wages lower, and decrease returns to work and investment. With nearly half of trade occurring between related parties, firm ownership should play a larger role in how economists think of tariff incidence.
In a world where half of imports move within multinational firms, tariffs are not as straightforward as a simple tool of foreign economic pressure. In an economy where American and foreign businesses span borders, tariffs punish efficient operations, slow competitiveness, and harm investment rather than support it.
Policymakers should be cautious about using tariffs as a blunt instrument that can easily harm American production—even when it appears to be hitting a foreign business.
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Estimates of the related-party share of US imports subject to recent tariff action use Census Bureau’s 2024 Related-Party Trade Data, published at the 6-digit NAICS level. Relevant NAICS codes were matched to each tariff directly or via the HTSUS to NAICS concordance, and related-party share was calculated as related imports divided by total imports across all matched 2024 trade. Exclusions and USMCA utilization rates were considered. NAICS codes are coarser than the HTSUS codes that define tariff scope; however, this precision gap affects related and total imports proportionally. Related-party trade data is not published below the NAICS6 level, so this remains an estimate constrained by that resolution rather than an exact tariff-line calculation.
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