Francesco Canepa and Howard Schneider
FRANKFURT/WASHINGTON (Reuters) – Early indications show U.S. companies and consumers are bearing the brunt of the country’s new import tariffs, which contradict President Donald Trump’s claims and complicate the Federal Reserve’s fight against inflation.
Trump had predicted that foreign countries would pay the price for their protectionist policies, betting that exporters would absorb the cost just to get a foothold in the world’s largest consumer market.
However, academic studies, surveys and comments from the business world show that in the first months of Trump’s new trade regime, it is US companies that foot the bill and pass some of it on to the consumer; Further price increases are also likely.
“The bulk of the cost seems to be borne by U.S. firms,” Harvard University professor Alberto Cavallo said in an interview to discuss his findings. “We have seen a gradual transition to consumer prices and there is clear upward pressure.”
A White House spokesman said “Americans may face a transition period from tariffs” but the cost “will ultimately be borne by foreign exporters.” The spokesperson added that companies are diversifying their supply chains and bringing production to the United States.
WHO EATS THE RECIPES?
Cavallo and researchers Paola Llamas and Franco Vasquez track the prices of 359,148 items, from carpets to coffee, at major online and brick-and-mortar retailers in the United States.
They found that since Trump began imposing tariffs in early March, imported goods have become 4 percent more expensive, while the price of domestic products has increased by 2 percent.
The biggest increases in imports were seen in goods that the United States cannot produce domestically, such as coffee, or that come from countries with high penalties, such as Türkiye.
These price increases, although material, were generally much smaller than the tariff rate applied to the products in question; This means that sellers also cover part of the cost.
But U.S. import prices, which do not include tariffs, showed that foreign exporters increased their prices in dollars and passed on some of the dollar’s depreciation against their own currencies to their U.S. buyers.
“This suggests that foreign producers do not absorb much of any of the U.S. tariffs, consistent with previous economic research,” researchers at the Yale University Budget Lab think tank wrote in a blog post.
National export price indices also paint the same picture. Except for Japan, the cost of goods exported by China, Germany, Mexico, Türkiye and India increased.
THE FULL EFFECT OF THE TARIFFS WILL YET BE FELT
Work is still ongoing to comply with Trump’s tariffs, a still-unfinished set of duties that raise import duties from an average of around 2 percent to an estimated 17 percent. This situation is likely to last for months longer as exporters, importers and consumers squabble over who will pay about $30 billion in tariffs a month.
“We shouldn’t expect this to be a one-time jump, instead firms are trying to find ways to soften the blow” and extend price increases over time, Cavallo added.
European automakers have so far tried to absorb more of the price impact, but consumer firms such as Tide detergent maker Procter & Gamble, Ray Ban maker EssilorLuxottica and Swiss watch maker Swatch have increased prices.
A Reuters tracker shows that about 72 percent of companies tracked by Reuters in Europe, the Middle East and Africa have flagged price increases since Trump’s trade salvos began. Only 18 companies warned about profit margins.
Separate Reuters analyzes of e-commerce sites Shein and Amazon showed strong price increases for Chinese products already sold in the United States, from clothing to electronics.
China’s so-called “anti-involution” policy, in which manufacturers are encouraged to reduce competition and even reduce capacity in key sectors, could add further fuel to the fire by restricting the supply of goods such as solar equipment.
All of this paved the way for higher inflation in the United States. The Fed cut its benchmark interest rate last month on concerns that the job market is weakening, but policymakers are divided on whether tariff-induced inflation will ease.
The Fed’s newest chairman, Stephen Miran, who took leave from the Trump administration, argued that the tariffs were not inflationary and eliminated concerns about what he called “relatively small changes in the prices of some goods.”
The Boston Fed’s “back-to-back” calculation predicted that tariffs would increase core inflation by 75 basis points.
Fed Chairman Jerome Powell said the tariffs accounted for perhaps 30-40 basis points of the latest core inflation reading of 2.9%, but the impact should be “relatively short-lived.”
The Peterson Institute for International Economics has predicted that inflation next year will be 1 percentage point higher if tariffs are not increased, but will fall thereafter.
GLOBAL TRADE IS SUFFERED AS CUSTOMS FORCES
But the rest of the world has no reason to celebrate.
Demand for exports is likely to slow as U.S. consumers try to keep up with rising prices. S&P Global’s survey of purchasing managers from companies around the world showed that new export orders have contracted at an accelerating pace since June.
European Union exports to the United States fell 4.4% from the previous year in July, the last month for which data is available, and Germany, the bloc’s former powerhouse, fell 20.1% in August.
The World Trade Organization also lowered its forecast for global goods trade volume growth next year to just 0.5%, citing the lagging effect of US tariffs. US shipping data tracked by German think tank Kiel Institute also showed a clear downward trend.
While all this partly reflects the strong frontloading of orders at the start of the year in anticipation of tariffs, it also leads to caution about the trade outlook.
Dutch bank ING expected a 17% drop in EU goods exports to the US over the next two years, saying this would cost the bloc 30 basis points in GDP growth.
“The expected impact of US tariffs has not yet materialized,” said ING economist Ruben Dewitte. “We anticipate these impacts will become more visible in the coming months.”
(Additional reporting by Marius Zaharia in Hong Kong; Jarrett Renshaw; Juveria Tabassum and Arriana Mclymore in Bengaluru; Adam Jourdan in London; Editing by Mark John and Andrea Ricci)
