Tariffs and the American Consumer
The news has been filled with headlines relating to President Trump’s Tariffs. While we read about new tariffs and pursuant retaliations, how does that affect the American consumer?
The International Trade Administration (ITA), defines tariff or duty as, “a tax levied by governments on the value including freight and insurance of imported products.”[i]
According to Dr. Samuel Kortum, Professor of Economics and Director of the Cowles Foundation for Research in Economics at Yale University, “Tariffs are like a sales tax, but they apply only to imports and are paid by the importer rather than by the ultimate consumer.”[ii] While importers do pay the tariff this does not mean that the consumer will not see an effect from the implementation of these duties.
In discussing the topic further, Dr. Kortum adds that “a large portion of the cost of a tariff will likely show up as higher prices for consumers.”
The added cost of imports and their increase in price could drive consumer purchasing behavior. For instance, according to Dr. Kortum, “the direct effect would be on the prices of goods produced abroad, but it could have ripple effects. For example, a 25% tariff on goods from Mexico could lead to as much as a 25% increase in the consumer prices of those goods. Consumers might choose to buy fewer of these imported goods and more domestically produced substitutes instead.”
Though it might sound good for domestic products, it can also affect the price of USA items as well. As stated by Dr. Kortum, “domestic producers of competing goods might also take the opportunity to raise prices.”
Dr. Kortum discusses that the price of tariffs may fluctuate for the American consumer, depending on the importer and foreign producer’s actions after they are levied a tariff. Dr. Kortum states that importers and foreign producers may absorb some of the cost of the tariff and “in that case only a fraction of the 25% tariff would be passed on to consumers.”
This sounds good in the instance it does occur but experience with tariffs and the Trump administration tells a different tale. Kortum states, “Evidence from the tariffs in the previous Trump administration suggests that foreign producers did not lower the prices they offered to importers to offset the tariff in this way. Other evidence suggests that importers may have absorbed some of the cost of the tariff, thus not passing on the full cost increase to consumers.”
It looks as though the word tariff could be loaded with uncertainty, however, the biggest takeaway is that tariffs will affect trade and will in turn affect prices. That means the cost of goods will go up. How much they will go up remains to be seen.
