Soon, Americans will be paying for Trump's tariff war

Economic Times

a day ago

NYT News Service President Donald Trump
Tariffs imposed by US President Donald Trump on dozens of countries, which came into effect on August 7, are touted as some kind of economic justice. Trump has claimed other countries will pay these tarifs, presenting them as a mechanism to balance trade deficits, punish unfair trade practices and bring back American jobs. The Trump administration collected nearly $30 billion in tariff revenue last month, according to the Treasury Department. That's a 242% jump in tariff revenue compared to last July. Since April, when Trump began imposing a 10% tariff across nearly all goods, among several other steeper levies that followed, the government collected a total of $100 billion in tariff revenue, three times the amount collected during the same four months last year. Trump is now playing with the idea of distributing some of the tariff revenue among taxpayers as rebate checks. 'We're taking in so much money that we may very well make a dividend to the people of America,' Trump said a few days ago.However, what Trump is hiding from Americans is that his tariff revenue is not being paid by other countries but American companies as a tax on goods they import from other countries, and soon they will be shifting this burden to American consumers.
Who is paying billions in tariffs?A tariff is essentially a tax imposed by a government on imported goods. When the US imposes a tariff, the tax is not charged to a foreign government or exporter directly. Instead, it is levied on goods as they enter the country, at the point of importation. The party responsible for paying the tariff is the American company that imports the product. The foreign exporter has no legal obligation to pay this tax, nor is it charged at the point of export. This reality stands in direct contradiction to President Trump's frequent assertion that China or other foreign countries are paying the tariffs.Although the importer is the one who pays the tariff upfront, the economic impact does not stop there. Tariffs act like a cost increase in the supply chain. American importers must decide how to absorb this new cost. In some cases, they may try to pressure foreign suppliers to lower their prices to offset the tariff, and occasionally, exporters will agree to partial discounts to maintain market access. However, this is not guaranteed and depends heavily on the competitiveness of the market and the elasticity of demand. More often, the increased costs are passed downstream. Importers may raise prices for wholesalers and distributors, who in turn pass the costs along to retailers. Ultimately, it is American consumers who feel the impact in the form of higher prices on everyday goods.
Why have prices not gone up so far?
So far, several short-term shock absorbers have kept consumer prices in check. Companies were reluctant to be the first to raise prices for fear of losing customers to competitors. Businesses rushed to import goods in bulk before the tariffs went into effect, building up stockpiles that delayed the financial impact.Many firms temporarily absorbed the cost hikes to maintain customer loyalty and market share. However, these are short-term strategies that companies cannot sustain. As inventories dwindle and operational costs climb, businesses are bound to pass on the increased costs to consumers.
"Even if they might not raise prices immediately, it's unlikely that most businesses are just going to be willing to eat the extra costs forever," Matt Schulz, chief consumer finance analyst at LendingTree, an online lending marketplace, told CBS MoneyWatch. The impact of tariffs on consumer prices was initially muted, explained Shulz, as firms can be reluctant to be the first among their competitors to institute price hikes. While some companies waited to see where tariff rates settled before adjusting retail prices, others took steps to absorb added costs to avoid turning off customers. But companies can't employ such measures forever, according to experts. "You don't want to be the first to raise prices, even if you have a perfectly legitimate reason for doing so," Schulz told CBS MoneyWatch. "So, I suspect once we see businesses start raising their prices more, that might embolden others to do so as well."
The domino effect: From company costs to consumer wallets With import prices rising due to the tariffs, companies will be passing those costs onto consumers. For example, consumer electronics and appliances -- industries heavily reliant on global supply chains -- are experiencing increased production costs. Retail and apparel sectors are especially vulnerable, as many depend on low-cost imported materials and finished products. Automobile manufacturers are being hit by both raw material tariffs (like on steel and aluminum) and finished parts, creating price pressures across new car sales and maintenance services.
Companies are dealing with tariffs in various ways, AP has reported. Many automakers appear to be swallowing tariff costs for now. But the world's largest eyewear maker, EssilorLuxottica, said it raised US prices due to tariffs, as per the AP report. The maker of Ray-Bans grinds lenses and sunglasses in Mexico, Thailand and China and exports premium frames from Italy. 'Retailers have been able to hold the line on pricing so far, but the new tariffs will impact merchandise in the coming weeks,' David French, chief lobbyist for the National Retail Federation, the nation's largest retail trade group, told AP a week ago. 'We have heard directly from small retailers who are concerned about their ability to stay in business in the face of these unsustainable tariff rates.'
As per a CBS News report, 76% of Texas manufacturers said they plan to pass tariff-related costs to consumers, while 50% say they will absorb costs internally, according to recent survey data from Apollo Global Management chief economist Torsten Sløk and the Federal Reserve Bank of Dallas. Large retailers have also warned that steep new levies on U.S. imports are likely to drive up prices. "The bottom line is that inflation will be rising significantly over the next six months," Sløk wrote in a recent blog post. In a recent EY survey of over 4,000 executives, two-thirds of respondents said they might have to pass tariff costs on to customers. More than 3 in 10 participants were willing to take it a step further and pass over 90% of the additional expense to shoppers, the poll found. The Center for American Progress, a nonpartisan policy institute based in Washington, D.C., notes that the economic fallout from the Trump administration's tariffs will fall largely on low- and middle-income consumers. The levies could cost households an average of $5,200 every year, according to the nonpartisan think tank. As per the Budget Lab at Yale, the price level from all 2025 tariffs rises by 1.8% in the short run, the equivalent of an average per household income loss of $2,400 in 2025. Ernie Tedeschi of The Budget Lab has told CNBC that American consumers are likely to absorb 80-90% of tariffs costs in the next few months, with foreign producers absorbing very little.
Executives from companies like Adidas, Stanley Black & Decker and Procter & Gamble have told investors that they plan to or have already passed on some tariff costs to customers, NYT reported. Walmart and the toymakers Mattel and Hasbro had already issued similar warnings that tariffs were likely to lead to higher costs for consumers. Chipotle Mexican Grill and McDonald's executives have pointed to early signs of strain among lower-income US households as spending at restaurants and on travel has begun to slow.
Americans could see inflation tick higher in 2025 as businesses start to pass on the cost of the Trump administration's tariffs to consumers through price hikes, Beth Hammack, president and CEO of the Federal Reserve Bank of Cleveland, told CBS News' Kelly O'Grady in a recent interview. Hammack said inflation could reach a 3% annual rate this year, representing a pace that would be 1 percentage point higher than the Fed's goal of a 2% annualized rate. 'People may increasingly rely on debt to maintain their lifestyles,' Shikha Jain, lead partner for consumer and retail in North America at the consulting firm Simon-Kucher, told NYT. 'That inflationary cycle could feed itself, creating a vicious loop of scarcity and cost increases.'Despite Trump's political rhetoric, the economic facts are stark: tariffs are mostly paid by Americans themselves -- first by companies, then by consumers. While the goal of strengthening domestic industry and correcting trade imbalances is valid, tariffs as a blunt policy instrument often backfire by raising costs at home. In the end, Trump's 'America First' trade war may hit hardest not in Beijing or Bengaluru but in Boston and Bakersfield, as American families face higher prices and fewer choices.
(With inputs from agencies)