By Francesco Canepa and Howard Schneider
FRANKFURT/WASHINGTON (Reuters) – U.S. businesses and consumers are bearing the brunt of new tariffs on the country’s imports, early signs show, contradicting President Donald Trump’s claims and complicating the Federal Reserve’s fight against inflation.
Trump predicted that foreign countries would pay the price for his protectionist policies, betting that exporters would absorb that cost just to keep a foot in the world’s largest consumer market.
But academic studies, surveys and business commentary show that during the first months of Trump’s new trade regime, it is American companies that foot the bill and pass some of it on to the consumer, and further price increases are likely.
“Most of the cost appears to be borne by American companies,” Alberto Cavallo, a professor at Harvard University, said in an interview to discuss his findings. “We have seen a gradual pass-through to consumer prices and there is clear upward pressure.”
A White House spokesperson said that “Americans could face a transition period from tariffs,” but the cost would “ultimately be borne by foreign exporters.” Companies were diversifying supply chains and bringing production to the United States, the spokesman added.
WHO EATS THE TARIFFS?
Cavallo and researchers Paola Llamas and Franco Vásquez have been tracking the price of 359,148 products, from rugs to coffee, at major physical and online retailers in the United States.
They found that imported goods have become more expensive by 4% since Trump began imposing tariffs in early March, while the price of domestic goods has increased by 2%.
The largest increases in imports were seen in goods that the United States cannot produce domestically, such as coffee, or that come from highly penalized countries, such as Türkiye.
These price increases, while significant, have generally been much lower than the tariff rate applied to the products in question, implying that sellers were also absorbing some of the cost.
However, prices for U.S. imports, which do not include tariffs, showed that foreign exporters have been raising their dollar prices and passing on some of the dollar’s depreciation against their currencies to their U.S. buyers.
“This suggests that foreign producers are not absorbing much or any of the U.S. tariffs, consistent with previous economic research,” researchers at Yale University’s Budget Lab think tank said in a blog post.
National export price indices show the same picture. The cost of goods exported by China, Germany, Mexico, Türkiye and India have increased, with the sole exception of Japan.
THE FULL IMPACT OF TARIFFS IS NOT YET FELT
Adaptation to Trump’s tariffs – a still-incomplete set of levies that raised taxes on imports from an average of about 2% to an estimated 17% – is still underway. It is expected to take months more as exporters, importers and consumers fight over who pays tariffs worth some $30 billion a month.
“We shouldn’t expect this to be a one-time jump, but rather companies are trying to find ways to soften the blow” and lengthen price increases over time, Cavallo added.
European automakers have – until now – sought to absorb more of the price hit, but consumer companies such as Procter & Gamble, maker of Tide detergents, EssilorLuxottica, maker of Ray Ban, and Swiss watch maker Swatch, have raised prices.
About 72% of companies in Europe, the Middle East and Africa tracked by Reuters flagged price increases since Trump’s trade broadsides began, a Reuters tracker shows. Only 18 companies have warned about profit margins.
Separate Reuters analyzes of e-commerce websites Shein and Amazon already showed sharp price increases for Chinese goods sold in the United States, from clothing to electronics.
China’s so-called “anti-involution” policy, under which producers are encouraged to reduce competition and even cut capacity in key sectors, could add fuel to the fire by curbing the supply of goods such as solar energy equipment.
All of this has set the stage for higher inflation in the United States. The Federal Reserve cut its benchmark rate last month over fears that the labor market was weakening, but policymakers are divided over whether tariff-fueled inflation is likely to fade or not.
New Federal Reserve Governor Stephen Miran, on leave from the Trump administration, maintains that the tariffs are not inflationary and has downplayed concerns about what he called “relatively small changes in the prices of some goods.”
An “introspective” calculation by the Boston Fed projected that the tariffs would increase core inflation by 75 basis points.
Federal Reserve Chair Jerome Powell said the tariffs accounted for perhaps 30 to 40 basis points of the latest core inflation reading of 2.9%, but that the effect should be “relatively short-lived.”
The Peterson Institute for International Economics estimated that inflation over the next year would be 1 percentage point higher than if tariffs had not been raised, but would then fall again.
WORLD TRADE IS SUFFERED BY TARIFFS
The rest of the world, however, has no reason to celebrate.
As American consumers struggle to keep up with rising prices, demand for exports is likely to slow. An S&P Global survey of purchasing managers at companies around the world showed new export orders contracted at an increasing pace since June.
European Union exports to the United States fell 4.4% from a year earlier in July, the last month for which data was available, and in Germany, the bloc’s former powerhouse, they fell 20.1% in August.
The World Trade Organization also cut its forecast for global merchandise trade volume growth next year to just 0.5%, citing a delayed impact from U.S. tariffs. US shipping data tracked by German think tank Kiel Institute also showed a clear downward trend.
While all of this may partly reflect a heavy concentration of orders early in the year in anticipation of tariffs, it is also raising caution about the trade outlook.
Dutch bank ING expected a 17% reduction in EU goods exports to the United States over the next two years, costing the bloc 30 basis points of GDP growth.
“The expected impact of the US tariffs has not yet materialized,” said Rubén Dewitte, an economist at ING. “We anticipate that these effects will be more visible in the coming months.”
(Additional reporting by Marius Zaharia in Hong Kong; Jarrett Renshaw; Juveria Tabassum and Arriana Mclymore in Bengaluru; Adam Jourdan in London; Editing by Mark John and Andrea Ricci)
