The Impact of US Tariffs: Who Really Pays?
US tariffs are creating a ripple effect felt by both businesses and consumers. Initially, many believed that foreign companies would bear the cost. However, recent data suggests it’s American companies who are feeling the pinch, which complicates efforts to curb inflation.
Harvard professor Alberto Cavallo notes that as tariffs first took effect, the increased costs mostly fell on US firms. They’ve often passed some of these costs onto consumers, leading to higher prices. For example, imported goods have risen by about 4%, while domestic products have gotten 2% more expensive. This reflects a broader trend where foreign sellers have also raised their prices in response, particularly for goods the US doesn’t produce.
The evolving landscape is backed by a study tracking over 350,000 goods sold across online and physical stores. The biggest jumps are seen in items like coffee that can’t be made domestically or come from high-tariff countries like Turkey. Surprisingly, many sellers are absorbing some of the costs instead of passing them all onto consumers.
While US import prices have been steadily climbing, economists from Yale find little evidence that foreign exporters are absorbing much of these new tariffs. This trend is prompting concern among economic experts. They argue that these tariffs could contribute to inflation, with estimates suggesting they may add up to 0.75% to core inflation over time.
As the Federal Reserve navigates this complex issue, it faces mixed opinions. Some argue that tariffs aren’t driving inflation significantly, pointing to minor price shifts. Nonetheless, a recent Boston Fed analysis indicated that tariffs could indeed affect inflation rates, with Central Bank Chair Jerome Powell acknowledging potential impacts.
The global trade landscape is shifting as well. Recent surveys show that demand for exports may decrease. European exports to the US saw a drop of 4.4% in July compared to the previous year, and Germany’s exports fell by over 20% in August. The World Trade Organization warns that global trade growth could slow to just 0.5% as the effects of these tariffs are felt internationally.
Experts at ING predict that EU exports to the US could drop by 17% over the next two years, potentially costing the European economy 30 basis points in growth. They note that the full impact of US tariffs hasn’t fully materialized yet, suggesting that time may reveal deeper challenges.
In summary, while tariffs were intended to protect the US economy, they present a mixed bag of outcomes. Both consumers and businesses face rising costs, and the repercussions are felt globally. This scenario highlights an essential part of economic policy: consequences often extend far beyond initial expectations.
For more in-depth analysis on this topic, see the Peterson Institute for International Economics here.
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