Who Pays Tariffs? Americans Will Bear the Costs of the Next Trade War

President Trump has started his second term in office with announcements of more tariffs on Canada, Mexico, China, steel, aluminum, autos, and countries that tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. certain US exports. When the Trump administration imposed tariffs on various imports in 2018, the stated purpose was to boost US industries and punish foreign exporters. But rather than hurting foreign exporters, the economic evidence shows American firms and consumers were hardest hit by the Trump tariffs.

As the scope of the tariffs continues to increase with the new announcements, the impacts will be felt even more broadly across the economy, and we should expect the results to be no different, and potentially even worse, than they were the last time around.

When the US imposes tariffs on imports, businesses in the United States directly pay import taxes to the US government on their purchases from abroad. The economic burden of the tariffs, however, could fall on others besides the US business directly paying the tax, including foreign businesses selling goods to US businesses (if foreigners lower their prices to absorb some of the tariffs) or US consumers ultimately purchasing the goods (if US businesses raise their prices to pass on the tariffs).

Historically, economists have found that foreign firms absorbed some of the burden of tariffs by lowering their prices, resulting in a combination of foreign businesses and domestic firms and consumers sharing the burden of tariffs. In contrast to past studies, however, recent studies have found the Trump tariffs were passed almost entirely through to US firms or final consumers.

• Economists Pablo Fajgelbaum, Pinelopi Goldberg, Patrick Kennedy, and Amit Khandelwal examinedthe tariffs on washing machines, solar panels, aluminum, steel, and goods from the European Union and China imposed in 2018 and 2019. They found that US firms and final consumers bore the entire burden of tariffs and estimated a net loss to the US economy of $16 billion annually, including more than $114 billion in losses to firms and consumers, offset by small gains to protected producers and revenue gains to the government.
• Economists Mary Amiti, Stephen J. Redding, and David E. Weinstein found nearly complete pass-throughfor the tariffs, noting that “US tariffs continue to be almost entirely borne by US firms and consumers.” Some differences emerged across product types. For instance, for steel, the authors found that an initial pass-through of 100 percent fell to 50 percent a year after the tariff was applied. Foreign exporters—mostly in the European Union, South Korea, and Japan—lowered their steel prices somewhat, but US firms and consumers still paid higher prices than they would have without the tariffs.
• A recent United States International Trade Commission (USITC) report also confirmed near complete pass-through to import prices. USITC found that imported steel and aluminum prices rose by 22 percent and 8 percent, respectively, following the tariffs. For China 301 tariffs, US importers absorbed the costs of the tariffs through a combination of less favorable margins for sellers and higher prices for consumers or downstream buyers.
• Researchby economists Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot found washing machine prices increased by about $86 per unit in the months following tariffs—and dryer prices increased too, by $92 per unit, even though dryers were not subject to the tariffs. Other research has also supported the finding.
• Economists Sebastien Houde and Wenjun Wang found that a $1 increase in tariffs on solar panels increased the final price of an installed solar panel system by $1.34. As the authors noted, “[m]anufacturers and installers thus over-shift the burden of the trade tariffs on US consumer.” Over-shifting can occur when domestic firms have “market power,” which enables them to raise prices above costs and increase profits.

However, while the tariffs predominantly resulted in complete pass-through to import prices, that was not always the case for final retail prices. Economists Alberto Cavallo, Gita Gopinath, Brent Neiman, and Jenny Tang studied retail prices that final consumers faced for handbags, tires, refrigerators, and bicycles at two large retailers. In the first months following the tariffs, they observed no price changes, but over time, and as the tariffs increased from 10 percent to 25 percent, the prices of handbags and tires rose rapidly while the prices of refrigerators and bicycles did not seem to deviate from previous trends.

Overall, they found a 10 percentage point tariff increase on a good increased the good’s price for final consumers by 0.44 percent after one year, relative to other goods in the sector. Their findings imply that the retail firms initially absorbed much of the tariffs in the form of lower profit margins rather than passing the higher costs to US consumers. In part, the muted price effects reflect other distortions too: firms building up their inventories of key products when the tariffs were announced and diverting orders to foreign firms not subject to the tariffs.

President Trump’s recent tariff announcements target much broader classes of goods. Companies will likely have less ability to absorb the tariffs in the form of lower profit margins and will have to pass along higher costs to the consumer.

Finally, while more tariffs are likely to raise prices for imported goods, how they will affect the overall price level and inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. rate depends on how the Federal Reserve responds.

The price level wouldn’t directly increase in response to tariffs—if businesses or consumers have to pay more for tariffed goods or higher-priced domestic substitutes, then they have less income left to spend elsewhere—prices and incomes in other sectors would fall elsewhere. However, if the US imposes a large enough tariff, the resulting reduction in economic activity would also entail a meaningful increase in unemployment. That would run counter to the Federal Reserve’s mandate of full employment, and prompt them to change monetary policy to raise the price level. Rather than a rise in unemployment, we would get a rise in the price level (note: it would be a one-time rise as the Fed responds to the new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ).

Under either scenario, businesses and workers in the United States would be worse off than if the tariff had not been imposed.

The bottom line is that contrary to President Trump’s claims, Americans will bear the costs of the next trade war in the form of lower incomes as tariffs cause prices of imported goods to rise. With polls showing Americans remain highly concerned about prices and inflation, it would be wise to avoid policies that further erode Americans’ standard of living.

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