Who pays the cost of tariffs?

Is the cost of tariffs passed on to consumers?

Is a tariff on imported goods really at tax on Americans?

In the campaign frenzy we have the odd situation of a pro-tariff former President (Trump) promoting tariffs – and being opposed by a candidate (Harris) who in theory is against them, but serves in an administration that has repeatedly extended those same tariffs.

A classic cognitive disconnect, common in politics because everyone involved is more concerned with “opposing the other side” than with “making sense.” But that’s not what we’re here to discuss today.

Whether tariffs are a good thing or a bad thing is not my topic right now. Regardless of the benefits (or lack) of tariffs, the topic is “who pays the cost?”?

That’s important because it’s a key talking point – if not the only talking point – debated between both camps. Whether the tariffs accomplish their purpose (which seems to be “levelling the playing field” to make American businesses more competitive) appears to be a side issue in most cases.

So we need to look at actual data to decide the answer to the question of whether the cost of tariffs is indeed – as Trump says – absorbed by manufacturers (by the Chinese, largely) or – as Harris says – paid by the consumer.

As with anything in politics, anecdotal stories abound.

We hear stories about washing machines, where tariffs appear to have increased prices. But later data – from the actual washing machine industry – indicates that increase was not sustained, and in the end US manufacturers benefited. The results for washing machines may be true, but I don’t care much about such niche, one-off product examinations. What about the oft-made claim that establishing (or increasing) tariffs on imported goods contributes to rising prices overall?

This makes somewhat “intuitive” sense, if we believe the cost of products produced in other countries (raw materials, labor, operating overhead, profits, etc.) is already “as low as it can go” and the only way a producer can continue to make a profit selling to Americans is to raise the price of their goods.

The argument often made is that this is a given. A truism we’re supposed to “just accept,” and assume every company and industry affected by tariffs is going to simply raise prices. Which eventually results in higher retail pricing for American consumers.

But what do we see in the actual data? Do we see higher inflation in periods following implementation of tariffs? Nope, that’s not quite what we see in the data.

Here is a graph of US inflation from 2000 to 2023.

*Data Source: U.S. Bureau of Labor Statistics: All items in U.S. city average, all urban consumers, not seasonally adjusted.

If we break this up by “Presidencies”, we see that the average for W (2001-2008) was 2.83%/year. For Barack (2009-2016), 1.38%/year. For the Donald (2017-2020), 1.88%/year, and for Joe (2021-2023), 5.6%/year.

Now, of course there were several “unusual events” during these periods. W had the market crash in 2001 and the Great Recession in 2008. Obama had the tail end of the Recession. Donald had the beginnings of the pandemic, and Joe the bulk of the economic impact of that event. But the numbers are what they are, and if we look at those numbers the worst Presidencies for inflation were W and Joe. Obama and Trump shared relatively even-keel, overall somewhat-low inflation rates.

The ”Trump Tariffs” were first implemented in January 2018, and continued to be put in place through early 2019. Note the “lower-than-usual” inflation during those years.

If tariffs were indeed driving inflation higher, it doesn’t seem to have done a particularly good job of it.

Of course later the effects of any tariff-induced inflation is completely swamped by inflation of the traditional sort, driven by enormous government deficit spending…

The argument the cost of tariffs are simply passed on to consumers (rather than absorbed by manufacturers) is accepted by one side despite the fact that in our everyday lives we see the opposite happen frequently. Particularly in cases where there is no option but to find ways to avoid passing the cost onto “someone else.” When the price of gas goes up not many of us have the luxury of immediately walking in to the boss and telling them they need to pay us more.

In both cases neither the manufacturer or you have an alternative.

In your job if you don’t have reasonable options that pay better, your only choice is to find a way to economize elsewhere. In manufacturing, if your largest market decides a price increase makes your product unaffordable you need to find a way to economize elsewhere.

Whether tariffs are effective or not they are most certainly not, as Harris and her surrogates keep saying, a “big sales tax.”

You would think a “professor of tax policy at UCLA law school” would be able to differentiate a tariff from a sales tax, but of course her intent is not a reasonable evaluation of the merits based on facts, but to parrot the current talking points of the moment on “her side.” And of course the media is not there to question her, so I guess that’s how it goes.

And… a related issue that could also be a side effect of tariffs – real wage growth.

From the Fed data for the last 40 years, it’s pretty clear that real wage growth went nowhere – until 2017, when it began rising for the first time in decades. Was the implementation of tariffs related? Who knows, it’s easy to make a correlation and easy to speculate why – if tariffs had their expected effect of incentivizing more domestic production of goods and services then that increase in labor need would be likely to drive up wages – but of course no one really knows.

The only thing we DO know is that there is a correlation. Which doesn’t prove causation, of course, but barring some other reason does indicate perhaps causation is likely.

https://fred.stlouisfed.org/series/LES1252881600Q

Whether tariffs accomplish their purpose or not is an open question that can be debated. But so far, from actual data, it appears increasing tariffs is not a driver of “higher than normal” inflation.