ROLLING FOR INITIATIVE -- WHO PAYS THE TARIFFS? (YOU DO)

A Kiel Institute study of over 24 million 2025 transactions (~$4 trillion) finds U.S. tariffs generated roughly $200 billion in customs revenue in 2025 (vs. $80 billion in 2024) and that 96% of tariff costs were borne by American companies and consumers, raising the average household’s annual cost by about $1,000. The research shows near‑complete pass‑through of tariffs to U.S. import prices for exporters from China, Brazil and India, with exporters maintaining prices and cutting volumes instead, and concludes tariffs adjust trade volumes and add stress and costs to U.S. manufacturers’ supply chains.

Analysis

Market structure: The Kiel study implies tariffs are a near-100% passthrough to U.S. consumers ($200B in revenue ≈ $1,000/household) and drive volume declines not price relief for exporters. Direct winners: U.S. Treasury (+$200B) and protected domestic producers with localized supply chains (steel, some heavy manufacturing). Direct losers: import-reliant retailers, consumer discretionary brands, and firms with low supplier substitutability where passthrough is feasible.

Competitive dynamics & supply/demand: Persistent high passthrough strengthens pricing power of foreign exporters in insource-constrained segments and reduces U.S. import volumes as exporters reallocate shipments — expect 5–15% demand hit in tariffed product lines within 3–12 months. Supply-side frictions raise input costs for U.S. manufacturers that rely on imported intermediate goods, compressing margins and forcing CAPEX for reshoring (multi-quarter to multi-year cycle).

Cross-asset & risk assessment: Expect upward pressure on headline inflation and thus nominal Treasury yields if tariffs persist (move 10y yield +20–50bps if CPI stays >3.5% YoY), USD may strengthen as imports fall. Tail risks: retaliatory tariffs, WTO rulings, or a consumer demand shock that cascades into earnings misses; immediate catalyst windows: next 30–90 days of corporate earnings and monthly CPI releases.

Trade implications & contrarian angles: Consensus undervalues heterogeneity — some large retailers (WMT, AMZN) can re-source or absorb margins while niche brands cannot. Historical parallel: 2018–19 tariffs produced similar passthrough and transient revenue boosts but longer-term winners were capex-intense domestic industrials; a policy reversal would rapidly re-rate import-exposed longs/shorts within weeks.

Key Decisions for Investors

• Establish a 2–3% portfolio short via 6-month put spreads on Target (TGT) to express margin pressure in import-heavy retail: buy 6-month ATM put, sell a 10–15% lower strike; exit if same-store sales beat consensus by >200bp on a 2-month rolling basis.
• Allocate 2–4% long to Nucor (NUE) for domestic steel benefit from tariffs and reshoring; use a 9–12 month horizon and layer via buy-and-hold plus 1:1 call spreads (buy 12-month ATM call, sell 12-month OTM call 20% higher) to fund upside while capping cost.
• Take 2–3% long exposure to Caterpillar (CAT) via outright shares or 12-month call spreads to capture higher CAPEX for reshoring; trim if orders backlog does not grow by ≥10% QoQ over two consecutive quarters.
• Pair trade: long NUE (2%) / short TGT (2%) to capture materials upside vs. retail margin compression; rebalance after quarterly earnings if NUE order backlog growth <5% YoY or TGT gross margin expands >100bp.
• Options hedge for macro risk: buy a 3–6 month S&P 500 put (5–7% OTM, notional ~0.5–1% portfolio) if CPI >3.5% YoY or Fed signals additional rate hikes; unwind if 10y Treasury yield rises <15bps after CPI release.