The Shifting Sands of Trade: How Search Frictions Determine Who Pays for Tariffs
Imagine a world where a sudden trade war erupts, and a 10% tariff is slapped on goods from France. Who ultimately bears the cost – the French exporter, the EU importer, or both? New research suggests the answer is surprisingly nuanced, and hinges on something you’ve likely never considered: how easily buyers can find new suppliers. This isn’t just an academic debate; understanding these “search frictions” is becoming critical for businesses and policymakers bracing for a potential return to protectionist trade policies.
The Hidden Costs of Trade Relationships
For decades, economists have debated the incidence of tariffs – who truly pays for them. Traditional models often assume perfect competition, where costs are easily passed along the supply chain. However, the reality of international trade is far more complex. Trade isn’t a faceless exchange; it’s built on a network of firm-to-firm relationships. And these relationships aren’t instantaneous. Buyers don’t have an infinite list of readily available alternatives.
Recent work by Fontaine et al. (2023) highlights the importance of “search frictions” – the time, cost, and effort involved in finding and vetting new suppliers. These frictions create a situation where buyers aren’t always able to switch suppliers easily, even if tariffs make their current supplier more expensive. This limited competition gives existing suppliers some pricing power, meaning they can pass on at least a portion of the tariff cost to their buyers.
How Search Frictions Play Out in Practice
The model developed by Fontaine, Martin, and Mejean (2023) demonstrates that the impact of a tariff can vary dramatically depending on the buyer. Some buyers, particularly those with limited access to alternative suppliers, may absorb the full cost. Others, with a wider network of potential partners, might be able to switch or negotiate lower prices. This heterogeneity is crucial.
Consider a French wine exporter facing a US tariff. A small, specialized importer in the US with exclusive distribution rights might have limited options and be forced to pay the full tariff. However, a large supermarket chain sourcing wine from multiple countries could easily switch to suppliers in Italy or Spain, forcing the French exporter to absorb the cost or lose business.
Interestingly, the research shows that prices actually decline within trade relationships over time as buyers encounter more potential suppliers. This dynamic suggests that the initial impact of a tariff might be greater, but the burden will likely shift over time as buyers diversify their sourcing.
The Implications for a Second Trump Administration
As economists like Gensler et al. (2025) assess the potential economic consequences of a second Trump administration, the issue of tariffs looms large. Olarreaga and Santander (2025) rightly ask: who will pay for these tariffs? The answer, according to this research, is: it depends. A blanket assumption that tariffs will be borne by foreign exporters is demonstrably false.
The level of search friction varies significantly across sectors and markets. Sectors with highly specialized products or limited supplier options will likely see a greater incidence of tariffs on buyers. Markets with strong existing trade relationships and high switching costs will also be more vulnerable. This means that targeted support for businesses affected by tariffs needs to be more sophisticated than simply assisting those directly interacting with impacted suppliers.
Beyond Tariffs: The Broader Impact of Supply Chain Vulnerabilities
The implications extend beyond tariffs. Geopolitical instability, natural disasters, and even pandemics can all create supply chain shocks. Understanding search frictions is crucial for building resilient supply chains that can withstand these disruptions. Companies that invest in diversifying their supplier base and reducing their reliance on single sources will be better positioned to navigate future challenges. See our guide on building supply chain resilience for more information.
Government Policy and the Future of Trade
The findings suggest that government support programs should focus on segments (products x destinations) where a higher incidence on buyers is expected – those facing greater search frictions. Alternatively, providing assistance to buyers in diversifying their supply base *after* a shock could be more effective than blanket subsidies. This approach would incentivize businesses to proactively reduce their vulnerability.
Furthermore, policies that reduce trade barriers and promote competition can help lower search frictions and increase the responsiveness of supply chains to shocks. Investing in digital infrastructure and trade facilitation measures can also streamline the process of finding and vetting new suppliers.
Frequently Asked Questions
Q: How can businesses assess their vulnerability to tariff shocks?
A: Conduct a thorough supply chain mapping exercise to identify critical suppliers and assess the availability of alternative sources. Evaluate the costs and time associated with switching suppliers.
Q: What role does technology play in reducing search frictions?
A: Digital platforms and online marketplaces can connect buyers and suppliers more efficiently, reducing the time and cost of finding new partners. Data analytics can also help identify potential risks and opportunities.
Q: Are some industries more vulnerable to tariff shocks than others?
A: Industries with highly specialized products, limited supplier options, and complex supply chains are generally more vulnerable. Industries with readily available substitutes and a competitive supplier base are less exposed.
Q: How can governments help businesses mitigate the impact of tariffs?
A: Targeted support programs, trade facilitation measures, and policies that promote competition can all help businesses reduce their vulnerability to tariff shocks.
The future of trade is likely to be characterized by increased uncertainty and volatility. Understanding the dynamics of search frictions and their impact on tariff incidence is no longer a niche academic concern – it’s a critical imperative for businesses and policymakers alike. What steps will *you* take to prepare for the shifting sands of global trade?
