How the United States is eating Trump’s tariffs

Academic studies and business reports indicate that U.S. companies and consumers are primarily bearing the cost of new import tariffs, not foreign exporters, with imported goods becoming 4% more expensive and domestic products 2% higher. This pass-through is contributing to higher U.S. inflation, with the Federal Reserve estimating a 30-40 basis point impact and other analyses suggesting up to a 1 percentage point increase over the next year, complicating monetary policy. Globally, the tariffs are significantly impacting trade, evidenced by contracting new export orders, declining EU exports to the U.S., and the WTO slashing its global merchandise trade growth forecast to 0.5%, signaling a broader economic slowdown.

Analysis

Academic studies indicate that U.S. companies and consumers are primarily bearing the cost of new import tariffs, contradicting initial assertions. Imported goods have become 4% more expensive, while domestic products rose by 2%, suggesting a significant pass-through of costs to the end consumer. This dynamic implies foreign exporters are not absorbing much of the tariff burden, as evidenced by rising dollar prices for imports.

These tariff-driven price increases are contributing to higher U.S. inflation, complicating the Federal Reserve's monetary policy decisions. While Fed Chair Powell estimated a 30-40 basis point impact on core inflation, other analyses project a more substantial effect, with a Boston Fed calculation suggesting 75 basis points and the Peterson Institute forecasting a 1 percentage point increase over the next year. This persistent inflationary pressure could limit the Fed's flexibility.

Globally, the tariffs are significantly dampening trade activity and economic growth. S&P Global data shows contracting new export orders, while EU exports to the U.S. declined by 4.4% year-over-year in July, with Germany seeing a 20.1% drop in August. The World Trade Organization has consequently slashed its global merchandise trade volume growth forecast to a mere 0.5%, signaling a broader economic slowdown exacerbated by these protectionist measures.

Key Decisions for Investors

• Investors should assess the persistent inflationary pressures from tariffs on corporate margins and consumer spending.
• Monitor global trade indicators and export-oriented companies, particularly those exposed to EU-US trade, given the significant slowdown.
• Evaluate companies' pricing power and supply chain diversification strategies in light of ongoing tariff absorption and price pass-through.