Why you should care
New tariffs mean new price hikes … and U.S. households are going to bear the brunt.
President Donald Trump has been sounding supremely confident that U.S. consumers will emerge unscathed from his trade war, but economists fear households are already starting to be hit by earlier rounds of tariffs and will face a mounting burden as hostilities escalate.
While the president has declared there is “no reason” U.S. households will have to pay the tariffs, recent academic studies argue the costs of existing levies have been passed on to households and businesses, and there is no clear evidence that Chinese exporters have cut their prices to compensate.
The Trump administration recently said it would raise tariffs on $200 billion of Chinese imports to 25 percent. It then set in motion a plan that could, following a comment period, impose 25 percent tariffs on a further $300 billion of Chinese imports. If the White House also goes on to impose tariffs on automotive imports (delayed at present), the peak boost to core inflation could reach 0.9 of a percentage point, according to Goldman Sachs analysts, alongside a dent in gross domestic product.
Research from Mary Amiti of the New York Federal Reserve, Stephen Redding of Princeton University and David Weinstein of Columbia University in March found that the “full incidence” of the tariffs has fallen on domestic consumers so far. This had imposed a so-called deadweight loss to the U.S. — a drain on the economy beyond the direct cost of the levies — of $1.4 billion a month by the end of last year. And that’s likely to worsen. According to one estimate, the latest tariffs could increase that deadweight to $6.6 billion per month.
That’s $628 per U.S. household per year.
Weinstein made that estimate in an interview, adding that once payments of tariffs to the federal government were included the total cost of said tariffs would double, from $4.4 billion a month at the end of last year to $8.8 billion a month once the new tariffs were implemented.
The administration has attempted to shield households from the tariffs under past rounds by excluding key categories of consumer goods, but it will not be able to avoid hitting households if Trump targets the rest of China’s exports to the U.S. Consumer goods account for only 25 percent of the items targeted by the increased tariffs, according to Goldman Sachs, but as much as 60 percent of the remaining imports from China.
Ken Perkins, president of Retail Metrics consultancy, estimates that U.S. retailers would push up prices on Chinese consumer products subject to tariffs by between 3 and 8 percent in response to the latest wave of levies. While the previous 10 percent increases “haven’t really had a lot of impact on price,” the rise to 25 percent was “a different story,” he says. However, Perkins notes that the highly competitive nature of the retail sector would constrain the industry’s ability to pass higher import costs on to shoppers.
Several retailers and manufacturers are trying to become less reliant on production and sourcing from China. Examples include GoPro, the camera-maker, which said it would press ahead with a plan to shift production of U.S.-bound goods from China to Guadalajara, Mexico. U.S. retailer Hudson, which operates 88 stores at locations including airports, hotels and train stations, also told analysts that the company was examining whether it could diversify its supply chain.
Even before the latest wave of tariffs, Americans had been paying more at the checkout on a range of products. Rising commodity, labor and transport costs have encouraged consumer product manufacturers and retailers to push up prices. Figures from Nielsen show that prices on a basket of household products like diapers and garbage bags rose 2.5 percent in the year to the end of March, more than double the rate of the previous year. Food and drink prices rose by 2 percent.
With the prospect of further escalation in hostilities ahead, Federal Reserve officials including New York Fed President John Williams are on the lookout for a boost to inflation. In addition, the potential drain on confidence among businesses, financial markets and consumers from a worsening trade war could damage growth, creating an “unfortunate cocktail” for Fed policymakers, says Torsten Slok at Deutsche Bank.
Yet some economists argue the bigger worry for the Fed will be the growth implications of a worsening trade conflict, given tariff increases should in principle wash out of inflation numbers once they are put in place. Slok says the boost from Republican tax cuts had helped mask the impact of tariffs last year, but this would fade over time. The key question now is the repercussions from trade tensions for the stock market, corporate confidence and household sentiment, he says.
“The tariffs are a stealth tax on American businesses and consumers,” says Mark Zandi, chief economist at Moody’s Analytics. If Trump ups the ante further and targets all Chinese imports, “American consumers will be on the front line of the trade war.”
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