It’s only a matter of time until Americans pay for Trump’s tariffs

NEW YORK – One of the reassuring things about the laws of physics is that they are immutable. They create a stable, predictable physical world, where balls roll downhill, parked cars stay put and the lawn chair you are sitting in does not vanish into thin air underneath you. The laws of economics, however, are not always so reliable.

Take tariffs. Back on April 2, President Donald Trump announced the most draconian set of tariffs the US has seen in decades.

World leaders panicked, markets tanked and economists of all stripes took to the airwaves, warning that we would see drastically higher prices as Mr Trump’s import taxes rippled through the economy. The Yale Budget Lab predicted clothing prices would spike 64 per cent in the short run.

Most of the Trump administration’s “Liberation Day” tariffs are still in flux, but the average tariff on goods coming into the US is more than 13 per cent, according to Bloomberg Economics.

But so far the impact has been difficult to see. Company earnings, for the most part, have been strong, markets have been ebullient, and the monthly inflation reports have remained pretty sleepy. (Clothing prices have actually ticked down a bit.) So... where did the tariffs go?

“There are essentially three parties who can end up bearing the cost of tariffs,” said economist Alberto Cavallo, head of the Pricing Lab at Harvard Business School.

“It could be foreign exporters, it could be the US firms that are bringing those goods into the US, or it could be US consumers.”

Studying real-time pricing data on hundreds of thousands of items from four major US retailers, Mr Cavallo and his team have tracked things from their countries of origin to store shelves to see how prices are fluctuating day to day and which of the three parties has been bearing the biggest costs of Mr Trump’s tariffs.

Let us examine.

Foreign companies

It has long been the administration’s claim that, while the US businesses importing goods might be the ones that pay the import tax, the foreign company on the other end of the transaction would foot the bill.

The idea is that exporters will agree to mark down their prices as a way to help US companies offset the tariffs. Strange as that may sound, it is not such an unreasonable assumption.

US companies – whether it is Amazon.com, Apple, Walmart or the local hardware store – are the gatekeepers to the American consumer, and the American consumer is, quite simply, the pot of gold at the end of the global economy’s rainbow.

US shoppers buying stuff constitute almost 70 per cent of the US economy and 15 per cent of the world’s economy.

For Canada, China, Colombia, Germany, Japan, Mexico and many others, the US is the top buyer of what they produce. Threatening to cut companies off from their biggest customer base unless they slash prices does seem, on some level, like an offer many countries could not refuse.

Except, apparently, most of them have. If the strong-arming had worked, the Import Price Index, which tracks what US companies pay for their imported goods, would be falling.

But so far the index has been inching up. Interestingly, almost the same thing happened during Mr Trump’s first (much more modest) round of tariffs in 2017: Import prices stayed largely the same. Foreign companies are not paying for the tariffs. So who is?

US companies

US businesses are the ones coughing up the money to pay the tariffs at ports and airports across the country.

Even at 10 per cent, those fees result in a substantial increase in costs. (One shipping container coming into the US will often carry US$1 million (S$1.28 million) worth of products. A 10 per cent tariff means US$100,000 more in taxes.)

This leaves companies with a couple of choices: They can eat those costs and simply accept lower profits, or they can pass those tariffs along to us. So far, neither has happened in a major way. What is going on?

Mr Chad Bown, an economist at the Peterson Institute for International Economics, has been studying the tariffs.

“It’s all that I do,” he said. He thinks we are in a kind of liminal space with tariffs. The reason: Many companies have not really been paying Liberation Day tariffs yet, because they started panic-importing long before April 2.

“Trump campaigned on tariffs,” Mr Bown said. “When Trump won the election, American companies said, ‘Gosh, we’d better import as much stuff as we can and put it into storage in case he actually does impose those tariffs.’”

Apple airlifted 600 tonnes of iPhones out of India shortly before the Liberation Day tariffs were announced, according to Reuters, and in the preceding weeks, import data shows companies all across the US had similar ideas.

Mr Bown said US businesses now have inventories they can draw down. That means they can hold off on raising prices and their profits will not suffer. But eventually the stockpiles will run out, and companies will find themselves between a profit hit and a price hike.

Still, we are not likely to see prices rise right at that point. For one thing, most businesses do not yet know how much they should raise their prices.

Since Liberation Day, the Trump administration has made (and remade) a handful of deals but has mostly delayed concrete decisions.

Mr Cavallo said: “Companies don’t actually know how much the tariffs will be in the end.” Raising prices is a serious endeavour. “It’s a very complicated decision for companies. They don’t want to antagonise their customers.”

Right now, US consumers seem to be feeling pretty antagonised about the economy in general. Raising prices risks alienating customers, not to mention giving a potential edge to competitors.

That is why companies are likely to wait, even if it costs them. In some cases, it already has.

General Motors (GM) reported a US$1.1 billion plunge in quarterly profit from a year ago, largely because of tariffs. GM made the decision to eat the costs of tariffs rather than pass them on to car buyers. 

Mr Cavallo expects we will see many more companies making similar announcements in the coming months.

He points to research he and his team did during Mr Trump’s 2017 tariffs. “It took a long time for companies to raise their prices,” he recalls.

“It actually took almost six months for us to start seeing an impact.” Even 1½ years after the tariffs had been imposed, Mr Cavallo and his team found many companies were still absorbing at least some of the financial burden.

US consumers

At some point, though, companies will almost certainly pass the tariffs along to customers. Data shows pricing has already started rising (an average of 3 per cent) in response to Mr Trump’s tariffs.

“These increases were largely driven by goods from China,” said Ms Paola Llama, a research fellow at Northwestern University’s Kellogg School of Management.

“We’re seeing this particularly in categories like household goods, furniture and electronics.”

But prices do not always tell the whole story. Inflation is something of a shape-shifter.

Tariffs can show up as fewer socks in your assorted package, more air in your potato chip bag, cheaper handles on your chest of drawers, flimsier thread in your shirt buttons. Shrinkflation, “skimpflation,” hidden fees, rolling back perks: These are all the ways companies can pass tariff costs on to customers.

Or the vanishing lawn chair

There is another way tariffs can manifest in an economy, though it is much harder to see.

“Sometimes goods just disappear,” Mr Bown said. Tariffs can make it unprofitable for companies to import goods, so oftentimes they’ll simply stop.

This means a smaller selection at the store. After Mr Trump’s first round of tariffs in 2017, imports from China dropped by roughly 10 per cent over the next couple of years.

Which items will be affected is difficult to know. The 50 per cent tariffs on steel and aluminium will touch products all across the economy: toys, electronics, cars, housewares and... even lawn chairs. BLOOMBERG