How the United States is eating Trump's tariffs

New research and business reports indicate that U.S. companies and consumers are primarily bearing the cost of U.S. import tariffs, rather than foreign exporters, contradicting initial government claims. Academic studies show imported goods have become more expensive, with foreign producers passing costs to U.S. buyers, leading to price hikes by consumer firms and contributing to inflationary pressures, which the Federal Reserve estimates could impact core inflation by 30-75 basis points. This dynamic is also negatively affecting global trade, evidenced by contracting export orders and reduced trade volume forecasts from the WTO and S&P Global, signaling a broader economic slowdown and potential future impact on GDP.

Analysis

Academic studies and business reports confirm that U.S. companies and consumers are primarily bearing the cost of new import tariffs, contradicting initial government assertions. Imported goods have become 4% more expensive, with domestic products rising 2%, as foreign exporters pass costs to U.S. buyers. Consumer firms like Procter & Gamble, EssilorLuxottica, and Swatch have already hiked prices, with 72% of EMEA companies flagging increases. This indicates a broad pass-through of tariff costs.

This dynamic is generating significant inflationary pressure, with the Federal Reserve estimating tariffs could add 30-75 basis points to core inflation. The Peterson Institute projects a 1 percentage point higher inflation over the next year. This complicates the Fed's monetary policy, as policymakers are split on the tariffs' long-term inflationary impact, despite a recent rate cut.

The tariffs are also severely impacting global trade, evidenced by contracting new export orders (S&P Global) and a slashed global merchandise trade volume growth forecast to 0.5% (WTO). European Union exports to the U.S. have declined, with Germany seeing a 20.1% drop in August, and ING forecasts a 17% reduction in EU goods exports to the U.S. over two years, impacting GDP. This points to a broader economic deceleration.

Key Decisions for Investors

• Investors should assess the margin resilience of companies with significant import exposure, as tariff costs are being passed through to consumers, potentially impacting demand.
• Monitor inflation data closely, particularly core inflation, given the Federal Reserve's split views and the projected 30-75 basis point tariff impact, which could influence future monetary policy decisions.
• Evaluate global economic indicators, especially export orders and trade volume forecasts, to gauge the broader deceleration in international trade and its potential drag on global GDP growth.