Study Finds Trump’s Tariffs Cost U.S. Consumers More Than Government Gains

[Thiệu Ngô]

Trump Tariffs Are Raising Prices for Consumers, Latest Evidence Shows

By: Alex Durante

Eight months into President Trump’s latest trade war, it’s worth examining how tariffs are affecting consumers. So far, the evidence shows that tariffs have raised overall retail prices by about 4.9 percentage points relative to the pre-tariff trend—a number that, while modest compared to some of the tariff
rate increases, we should expect to rise even more over the coming months if the International Emergency Economic Powers Act (IEEPA) tariffs are upheld by the Supreme Court.

Tariffs can raise prices for consumers in two ways. One is through the direct impact of the tariff: the increase in the import price itself. Academic studies showed that during Trump’s first trade war in 2018, it was the importer, and not the exporting foreign firm, that bore almost all of the tariff. That is, the import price rose by almost exactly the amount of the tariff applied.

In most cases, the importer is going to be a business, and will therefore have some latitude when choosing how much of the increase in the import price to directly pass on to the final consumer. For this reason, pass-through of the tariff to the retail price may be less than the actual tariff rate applied if the firm chooses to absorb some of the increase in the form of lower profits and investment. Note, however, that this does not imply that consumers would be shielded from the costs of the tariffs. The burden would be shared by shareholders, business owners, and their workers (which includes consumers).

There is, however, an indirect way in which tariffs can also raise prices for consumers that will also likely be smaller than the tariff increase: firms and consumers may switch to domestically available substitutes. Consider the current tariffs on steel and aluminum, which are set at 50 percent. These high tariffs make domestic steel and aluminum relatively more attractive to manufacturing firms, as those prices would be comparatively cheaper than the tariff-burdened import price.

Due to the protectionist tariffs, domestic steel and aluminum smelters will also be incentivized to raise their prices, while keeping prices just below the import price to remain competitive. Indeed, both imported and domestic steel and aluminum prices increased after President Trump imposed tariffs in his first term.

To assess the impacts of the tariffs on retail prices of both domestic and imported goods, a team of Harvard economists has been tracking retail prices using real-time barcode data. The latest data through early October show that tariffs have raised retail prices on average by about 4.9 percentage points relative to the pre-tariff trend, 6.0 percentage points for imported goods and 4.3 percentage points for domestic goods. Several goods have experienced notably large price increases, including apparel (8.99 percentage points), coffee and tea (7.5 percentage points), cameras (7.5 percentage points), household textiles (6.2 percentage points), and furniture (6.5 percentage points).

While these effects are not small, they are more modest compared to the overall tariff rate increases we have seen. There are a few reasons why this is the case. One is the general uncertainty regarding the overall tariff regime. With President Trump frequently changing tariff rates in both directions, firms may adopt a “wait-and-see” approach before making changes in their overall pricing strategy. This is consistent with the survey evidence from this summer, which generally found that US businesses in the short run were more likely to absorb some of the tariffs. Further complicating matters is the pending November Supreme Court decision on the tariffs, which could lead to the IEEPA tariffs being overturned and IEEPA tariff revenue refunded to taxpayers.

Another reason for only small price increases so far is that some firms may operate on a contract basis and have already locked in their prices for the year. For example, farm equipment is typically leased on a yearly basis so that these suppliers can smooth out their demand around crop cycles or insulate themselves from bad weather events. Finally, some firms have preexisting inventory from which they were drawing down, so their retail goods on the market were stocked prior to the tariffs taking effect. President Trump and those in his administration have insisted that consumers are not bearing any of the tariffs. But the latest data show exactly the opposite. If the Supreme Court rules that the IEEPA tariffs may remain in place, we should expect even more price hikes heading into this holiday season and early next year.