Who Really Pays the Tariffs? U.S. Firms and Consumers, Through Higher Prices

December 15, 2021

When the Trump administration imposed tariffs on various imports in 2018, the stated purpose was to boost U.S. industries and punish foreign exporters. But rather than hurting foreign exporters, the economic evidence shows it is American firms and consumers hardest hit by the Trump tariffs. The tariffs resulted in higher prices for a wide variety of goods that U.S. consumers and businesses purchase. The Biden administration has continued and even increased many of the Trump tariffs—drawing some attention as inflation rises. And while tariffs do raise prices for American consumers, their impact on economy-wide inflation is relatively small.

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

Historically, economists have generally found that foreign firms have absorbed some of the burden of tariffs by lowering their prices, meaning domestic firms and consumers haven’t borne the entirety of higher tariffs in the past. In contrast to past studies, however, new studies have found the Trump-Biden tariffs have been passed almost entirely through to U.S. firms or final consumers.

Economists Pablo Fajgelbaum, Pinelopi Goldberg, Patrick Kennedy, and Amit Khandelwal examined the tariffs on washing machines, solar panels, aluminum, steel, and goods from the European Union and China imposed in 2018 and 2019. They found that U.S. firms and final consumers bore the entire burden of tariffs and estimated a net loss to the U.S. 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.  

Using a slightly different methodology, economists Mary Amiti, Stephen J. Redding, and David E. Weinstein also found nearly complete pass-through for 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 U.S. firms and consumers still paid higher prices than they would have without the tariffs.

Also finding some differences across products and timing, a study by economists Alberto Cavallo, Gita Gopinath, Brent Neiman, and Jenny Tang looked at retail prices 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 were hiked 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 absorbed much of the tariffs initially in the form of lower profit margins rather than passing the higher costs to U.S 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.

In some cases, however, U.S. firms over-shifted the burden of tariffs to final consumers. For example, a new paper by 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. The authors noted “[m]anufacturers and installers thus over-shift the burden of the trade tariffs on U.S. consumer.” Over-shifting can occur when domestic firms have “market power,” which enables them to raise prices above costs and increase profits. Despite the higher prices, though, the U.S. industry was not better off, as the authors noted “U.S. manufacturers gained little from the anti-dumping policies whereas U.S. installers were largely negatively affected…the solar trade war led to large welfare losses in both countries and substantially slowed the adoption of solar PV.”

Other research by economists Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot found a similar over-shifting effect with the tariffs on washing machines. They observed 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. Their findings were backed up by the Cavallo et al. study cited above, which found significant increase in the retail prices for washers and dryers following the tariffs.

While it’s clear that tariffs raised consumer prices, it’s less clear how those prices compare in the context of economy-wide inflation. The Federal Reserve Bank of San Francisco estimated in February 2019 that the first three tranches of tariffs on Chinese goods raised economy-wide consumer prices by 0.1 percentage points. There have been several changes to tariff policy since February 2019 (most notably raising tariffs on Chinese imports to 25 percent), a change which the study estimates would raise consumer prices by an additional 0.3 percentage points.

Nonetheless, in the context of recent inflation, they’re still likely a relatively marginal issue. With a series of pandemic-related shifts in consumer demand and related supply chain holdups, in addition to large fiscal and monetary policy actions, tariffs are a minor piece of the puzzle related to overall retail prices. However, there’s a case to be made that tariffs on intermediate goods (like metals or lumber) could also be making the supply chain problems more difficult. Companies are racing to build capacity to address supply chain issues, but making lumber more expensive as the Biden administration has done by doubling tariffs on imports of Canadian lumber makes new investments more costly and therefore less likely. So, in the current situation, tariffs may also be raising inflation through multiple channels, but it’s still not close to the main story.  

Ultimately, tariffs raise prices for American consumers, but they aren’t the primary culprit for recent surges in inflation. Nonetheless, a repeal of them would be a directional improvement.

 


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Inflation 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.

Tariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers.