Market Power Shifts Tariff Costs to Suppliers

New research challenges the conventional wisdom that U.S. consumers fully bear tariff costs, demonstrating that dominant U.S. importers leverage significant bargaining power to force foreign exporters to absorb a substantial portion of these expenses. Analysis of U.S. customs data reveals that tariff pass-through to import prices was only 65-70%, with foreign suppliers often reducing production costs and margins, particularly when dealing with large buyers like Walmart or Apple. This dynamic results in an uneven impact on consumers and highlights how buyer market power reshapes global supply chains, influencing supplier resilience, and necessitating a re-evaluation of antitrust and trade policies to account for monopsonistic effects.

Analysis

New research indicates that the incidence of U.S. tariffs, such as those imposed in 2018, is significantly influenced by buyer-seller bargaining power, challenging the conventional view that costs are fully passed to U.S. consumers. Analysis of U.S. customs data reveals dominant U.S. importers possess approximately four times more bargaining power than foreign suppliers. This leverage allows large buyers to cushion themselves from tariff shocks, forcing foreign exporters to absorb a substantial portion of the costs.

The study found that tariff pass-through to import prices was only 65-70%, significantly lower than the near 100% suggested by prior aggregate data studies. Foreign exporters absorb these costs through reduced margins and lower production costs, sometimes selling at or below marginal cost to retain large clients. This dynamic means large U.S. buyers like Walmart (WMT) and Apple (AAPL) can negotiate lower pre-duty prices, while smaller importers face higher costs, leading to an uneven impact on U.S. consumers.

These findings highlight how market power shapes global supply chains, potentially weakening suppliers and affecting long-term resilience and investment. The research reframes debates on protectionism, showing tariffs are blunt instruments whose effects are mediated by firm-to-firm bargaining, leading to asymmetric outcomes. For corporate boards, this underscores the strategic importance of supply chain visibility and leverage, though relying solely on squeezing suppliers carries risks of future disruptions.

Key Decisions for Investors

• Investors should recognize that dominant U.S. importers, exemplified by Walmart and Apple, possess a structural advantage in mitigating tariff impacts, potentially leading to more stable margins during trade disputes.
• Assess the tariff exposure of smaller, import-reliant businesses, as these firms lack the bargaining power to shift costs to suppliers, making them more vulnerable to price increases.
• Monitor for potential shifts in antitrust policy, as the research suggests increased scrutiny on monopsonistic buyer power could impact supply chain dynamics and profitability for dominant firms.
• Evaluate the long-term resilience and diversification strategies of foreign suppliers, as their profitability and investment capacity may be compromised by consistent cost absorption during trade shocks.