US households to feel pinch of hefty tariffs

Business forecasters say import levies could lead to consumer price increases

The administration of Donald Trump went ahead with its tariff war on Tuesday, imposing 25 percent import duties on Canada and Mexico and doubling its 10 percent duties on Chinese goods.

This move has drawn swift countermeasures and strong objections from these three countries.

Later on Tuesday, US Commerce Secretary Howard Lutnick said that the US would likely meet Canada and Mexico "in the middle", with an announcement coming as soon as Wednesday, while maintaining pressure on China.

The new tariffs imposed on China were not a surprise to the business community and policy watchers in the United States, but Treasury Secretary Scott Bessent's comments that increased taxes will force cost pass-throughs onto producers outside the US were quite unexpected to many.

"China will pay for the tariffs because their business model is exporting their way out of this inflation," Bessent said in an interview on Sunday. "They will eat any tariffs that go on."

The remarks, made in response to possible extra costs to US households following the tariffs, reflect a common political narrative, but hardly align with the economic reality as observed from the 2018-19 trade war and beyond, which tells a more nuanced story.

Many businesses and market forecasters say these import levies could lead to consumer price increases.

"Tariff-induced disruptions risk exacerbating inflation, increasing the cost of essential goods, and placing financial strain on businesses and consumers alike," the National Association of Wholesaler-Distributors, a trade group, said in a statement on Tuesday.

The American Apparel & Footwear Association also noted each code of the tariffs "snowballs into a growing — and potentially crushing — burden" on US businesses and families.

Undermining vitality

"Uncertainty and instability are corrosive, undermining the vitality of our consumer-driven economy, and the 3.5 million American jobs created by our industry," said Steve Lamar, the trade association's president and chief executive officer.

Bessent implied that Chinese producers, reliant on high export volumes, might be forced to cut prices to maintain market share, but most studies on the trade war during Trump's first term showed a different picture.

In "The Economic Impacts of the US-China Trade War", a 2021 National Bureau of Economic Research working paper, economist Pablo Fajgelbaum and colleagues found that "US consumers of imported goods have borne the brunt of the tariffs through higher prices".

They concluded that empirical work shows a "complete pass-through of tariffs" to tariff-inclusive import prices, where tariff-inclusive import prices rise with tariff changes.

"What we found was that the prices charged by Chinese exporters did not go down in response to the imposition of tariffs," said Fajgelbaum, a professor of economics at the University of California, Los Angeles, citing the paper, according to an article published on The New Yorker on Feb 24.

Another study, "Tariff Pass-through at the Border and at the Store: Evidence from US Trade Policy" that focused on tariffs on China imports, also found that the tariffs were "almost fully "passed through to total prices paid by importers, suggesting the tariffs' incidence has fallen largely on the US.

"US tariff pass-through into US import prices was nearly 95 percent after one year, whereas foreign tariff pass-through into foreign import prices was perhaps as low as 50 percent," noted the International Monetary Fund working paper released in October 2019.

A recent Moody's analysis noted that nearly all of the 10 percent additional tariff on game consoles imported from China would be passed through to consumers, raising the price of a $500 machine to $548, The Wall Street Journal said in a report titled "How Much Do Tariffs Raise Prices?", published on Sunday.

Echoing the findings, "Trump Tariffs: Tracking the Economic Impact of the Trump Trade War", a study by the nonpartisan Tax Foundation that was updated on Monday, estimated that the proposed additional tariffs on Canada, Mexico and China would reduce the after-tax purchasing power of US households by approximately 0.8 percent in 2025.

Erica York, vice-president of federal tax policy with the Tax Foundation's Center for Federal Tax Policy, called the reduction "the largest tax increase since 1993".

The Tax Foundation's analysis further projected that the proposed tariffs would decrease US economic output by 0.4 percent and increase taxes by $1.1 trillion, equating to an average tax increase of more than $800 per US household in 2025.

It is not the first time that Bessent has suggested that "the companies on the other side, the exporters, are going to eat a lot of the cost". He made the claim, specifically mentioning China, in an interview aired on Feb 18.

But the reality on the ground, as well as historical evidence, indicates that US consumers and businesses often bear the majority of the costs through higher prices.

Agencies contributed to this story.

huanxinzhao@chinadailyusa.com