Donald Trump has been sounding supremely confident that US consumers will emerge unscathed from his trade war, but economists fear households are already starting to be hit by earlier rounds of tariffs and will face a mounting burden as hostilities escalate.
While the president has declared there is “no reason” US households will have to pay the tariffs, recent academic studies argue the costs of existing levies have been passed on to households and businesses, and there is no clear evidence that Chinese exporters have cut their prices to compensate.
With the prospect of further escalation in hostilities ahead, Federal Reserve officials including New York Fed president John Williams are now on the lookout for a boost to inflation. In addition, the potential drain on confidence among businesses, financial markets and consumers from a worsening trade war could damage growth, creating an “unfortunate cocktail” for Fed policymakers, said Torsten Slok at Deutsche Bank.
“The tariffs are a stealth tax on American businesses and consumers,” said Mark Zandi, chief economist at Moody’s Analytics. If Mr Trump ups the ante further and targets all Chinese imports, “American consumers will be on the front line of the trade war”.
On Friday, the Trump administration said it would raise tariffs on $200bn of Chinese imports to 25 per cent. It then set in motion a plan that could, following a comment period, impose 25 per cent tariffs on a further $300bn of Chinese imports. If the White House also goes on to impose tariffs on auto imports, the peak boost to core inflation could reach 0.9 of a percentage point, according to Goldman Sachs analysts, alongside a dent in gross domestic product.
Research from Mary Amiti of the New York Fed, Stephen Redding of Princeton University and David Weinstein of Columbia University in March found that the “full incidence” of the tariffs has fallen on domestic consumers so far. This had imposed a so-called deadweight loss to the US — a drain on the economy beyond the direct cost of the levies — of $1.4bn a month by the end of last year.
Prof Weinstein said in an interview he estimated the administration’s decision to boost tariffs on $200bn of imports from China would increase the deadweight cost to $6.6bn a month, or $628 per household a year. Adding in the payments of tariffs to the federal government, the total cost of the tariffs would rise from $4.4bn a month at the end of last year to $8.8bn a month once the new tariffs were implemented, he estimated.
The administration has attempted to shield households from the tariffs under past rounds by excluding key categories of consumer goods, but it will not be able to avoid hitting households if Mr Trump targets the rest of China’s exports to the US. Consumer goods account for only 25 per cent of the items targeted by the increased tariff unveiled on Friday, according to Goldman Sachs, but as much as 60 per cent of the remaining imports from China.
Ken Perkins, president of the Retail Metrics consultancy, estimated that US retailers would push up prices on Chinese consumer products subject to tariffs by between 3 and 8 per cent in response to the latest wave of levies. While the previous 10 per cent increases “haven’t really had a lot of impact on price”, the rise to 25 per cent was “a different story”, he said.
Executives echoed that sentiment. Presenting earnings on Tuesday, Jane Hamilton Nielsen, Ralph Lauren’s chief financial officer, said that while the tariffs so far had a “limited impact”, the fashion group was taking steps to “mitigate the long-term impact” of further increases.
Several retailers and manufacturers are trying to become less reliant on production and sourcing from China. Examples include GoPro, the camera maker, which said this week it would press ahead with a plan to shift production of US-bound goods from China to Guadalajara, Mexico.
US retailer Hudson, which operates 88 stores at locations including airports, hotels and stations, also told analysts this week that the company was examining whether it could diversify its supply chain. Roger Fordyce, chief executive, said the company was examining costs and that the group planned to adjust retail prices accordingly.
However, Mr Perkins noted that the highly competitive nature of the retail sector would constrain the industry’s ability to pass higher import costs on to shoppers.
Even before the latest wave of tariffs, Americans had been paying more at the checkout on a range of products. Rising commodity, labour and transport costs have encouraged consumer product manufacturers and retailers to push up prices.
Figures from Nielsen show that prices on a basket of household products, from nappies to bin bags, rose 2.5 per cent in the year to the end of March, more than double the rate of the previous year. Food and drink prices rose by less, up 2 per cent, picking up from a 1.4 per cent increase the previous year.
Government inflation data covers a far broader range of prices, including healthcare, financial services and accommodation costs. Overall, inflation numbers remain quiescent, with the core personal consumption expenditure price index rising just 1.6 per cent year on year in March, and the Fed’s bigger concern in recent months has been low price growth.
Mr Williams told Bloomberg on Tuesday that the tariffs that had already been announced could add two-tenths to the inflation rate over the next year, but the effects would get larger if there was a further escalation of tariffs. This could be a “significant effect”, he added.
Yet some economists argue the bigger worry for the Fed will be the growth implications of a worsening trade conflict, given tariff increases should in principle wash out of inflation numbers once they are put in place.
Deutsche Bank’s Mr Slok said the boost from Republican tax cuts had helped mask the impact of tariffs last year, but this would fade over time. The key question now was the repercussions from trade tensions for the stock market, corporate confidence and household sentiment, he said.