It is time to finally retire the idea that the Trump administration’s tariffs hurt U.S. consumers.
When President Donald Trump began to impose tariffs on imported steel and aluminum and on goods from China, a chorus of economists and corporate media voices rose up in protest to decry the harm these would do to consumers. Now the results are in and those predictions have been shown to have been decisively wrong.
Yet somehow the myth that tariffs are squeezing U.S. consumers persists. It recently came up in a debate between Alan Tonelson, one of America’s most influential economic nationalists, and Jason Furman, a professor of economic policy at Harvard Kennedy School and former chairman of the Council of Economic Advisors under President Obama. Furman claimed, without any evidence at all, that consumer prices were rising.
“Do you shop for your family? Do you buy backpacks for your children? Do you buy dishes? Do you buy televisions? The prices of all of these are higher because of these sorts of tariffs,” Furman said.
This is just plain wrong. Backpacks are considered sports equipment in the consumer price data. These prices are down 2.2 percent compared with a year ago. Deloitte’s annual “back to school” survey found that on average households would spend $519 per student buying clothing, supplies, computers, and electronics for children in grades K to 12. That’s a mere 1.76 percent increase from the year before. Back in the 2017 season, the last one prior to tariffs, back to school inflation ran at 2.45 percent. Back-t0-school inflation has fallen under tariffs.
Dishes and flatware prices are up 2.6 percent compared with last year, only three-tenths of a percentage point higher than overall prices.
Furman’s claim about televisions is comical. Prices of televisions have fallen for seventeen consecutive months. They are down 20.5 percent compared with last year.
In other words, Furman could not have been more wrong.
Overall consumer prices rose two-tenths of a percentage point in December, a slower pace than the four-tenths rise in October or the three-tenths rise in November, the Labor Department said Wednesday. Compared with a year ago, the government’s Consumer Price Index is up 2.3 percent.
So-called core CPI, which subtracts volatile food and energy prices, rose one-tenths of a percentage point. This suggests that the recent tariff hikes have not created pricing pressure on store shelves.
Let’s start with toys, though, since December’s prices impact shopping in the Christmas season. Toy prices fell in December for the third consecutive month. Compared with a year ago, toy prices are down a whopping 7.1 percent.
The Imaginary Tariff Panic of 2018-2019
The U.S. imposed tariffs on imported steel and aluminum in the spring of 2018. In July of 2018, the U.S. government imposed tariffs on around $34 billion of mostly-high tech Chinese products used by American businesses. That was followed by another round of tariffs on $16 billion of similar business goods in August of 2018.
In September of 2018, the U.S. imposed a 10 percent tariff on $200 billion of Chinese goods. A “trade truce” put the brakes on new tariff hikes for months as the U.S. and China negotiated a trade deal. But those talks fell apart in May 2019 when China attempted to renege on its commitments and the U.S. responded by hiking tariffs on the $200 billion to 25 percent. In September of last year, a 15 percent tariff was applied to around $110 billion of additional Chinese goods.
Each new round of tariff was greeted with panicky headlines predicting that U.S. consumers would be squeezed by rising prices as retailers and importers passed the cost of tariffs on to shoppers.
- “Trump’s trade war may soon hit consumers’ wallets and paychecks,” NBC News declared in a headline last year.
- “Tariffs will surely lead to higher prices for imported goods and, to a lesser extent, prices for non-imported goods that use imported materials,” the University of Pennsylvania’s business school Wharton reported.
- “Tariffs are about to hit consumers, and it won’t be pretty,” CNBC claimed.
- “Trade restrictions, by their nature, result in price increases for the goods in question. If the price of steel and aluminum goes up, manufacturers will be forced to pass those costs onto American consumers,” wrote Tori K. Whiting, the Jay Van Andel Trade Economist at the Heritage Foundation’s Roe Institute for Economic Policy Studies.
Commerce Secretary Wilbur Ross, however, said all of these predictions of higher prices were wrong. To the contrary, Ross argued tariffs would have little to no effect on U.S. consumers. He held up cans of Campbell’s soup and Budweiser beer to illustrate his point that the metals input into most consumer prices was very low and prices were unlikely to rise.
When prices did not rise as predicted, the critics did not back off their claims. Many just moved the time frame, arguing that the forecast price increases were just taking time to move through the economy. But as the Trump administration’s tariffs enter their third calendar year, this looks increasingly absurd.
Tariffs are Taxes, Who Pays is Complicated
So who is paying for the tariffs? We know the U.S. government has collected tens of billions of dollars in tariffs since it began raising tariffs last year, so it is clear that someone is footing the bill. But the pricing data do not support the often-repeated mantra that “tariffs are taxes on consumers.”
Tariffs are taxes, to be sure. But unlike a sales tax or a gas tax, consumers do not directly pay any tariffs. Tariffs are paid by importers, often large U.S. companies that are importing from their own foreign subsidiaries or foreign contractors. But businesses cannot raise their prices just because their costs or taxes go up. Sometimes they have to absorb the costs.
We have seen this recently with wages. Wages have been rising faster than inflation, which means labor costs are rising faster than prices. Employers cannot easily push higher labor costs onto consumers. Similarly, the massive cut in corporate taxes enacted at the end of 2017 did not automatically translate into businesses slashing prices because their tax costs had fallen.
“We have put 25 percent on $250 billion of Chinese goods coming into our country, including $50 billion of high technology equipment. You haven’t seen any, or virtually any, price increase,” President Trump said this summer. “Because what China does is they subsidize their companies because they want to keep people working and they want to stay competitive.”
No Inflation Despite Tariffs
What both the Producer Price Index, which measures prices received by businesses, and the better known Consumer Price Index have been suggesting over the last year or so is that tariffs have not had a very big impact on prices in the U.S. That should not be very surprising. The metals tariffs have led to U.S. metals producers expanding capacity, which reduces the impact of taxes on imported metals. And a ten percent tariff on $200 billion of goods in our $20.5 trillion economy amounts to a 0.1 percent tax.
When the San Francisco Federal Reserve estimated the effect of tariffs on prices, they came to the conclusion that it had a 0.1 percent impact. But that may exaggerate the effect on consumers if businesses cannot pass on the cost of tariffs.
Big Ticket Holiday Gifts
Many of the categories of consumer goods that are largely manufactured abroad saw steep declines in December, defying predictions that the China tariffs implemented this year would weigh on consumers during the holiday shopping seasons.
Prices of major appliances dove 3 percent in December. Compared with a year ago, prices are down 7 percent. You read that right: major appliances cost 7 percent less this past December than they did in December 2018.
Tools and hardware were often cited by those promoting the “tariffs are taxes on consumers” narrative. But prices on these fell 0.7 in December are down 1.6 percent compared with a year ago.
The price of computers, digital homes assistants, and phones were predicted to see upward pressure from tariffs on China. While these are not yet subject to direct tariffs yet, some of their components are. But computers and related hardware prices are down 5.3 percent compared with last year. Phone prices fell again, for at least the 16th consecutive month and are now down 14.3 percent compared with a year ago. We’re now compounding annual price declines in phones.
We’re now over a year into the anti-dumping tariffs imposed in January of last year on washing machines. These were intended to drive up the price from artificially depressed levels and accomplished that goal last year. Those washing machine price gains, however, have faded. Laundry equipment prices fell 4.2 percent in August, fell another half a percentage point in September, bounced back 1.4 percent in October, rose 2.1 percent in November, and fell 3.1 percent in December. They are now down 8.56 percent compared with a year ago, when prices were reflecting that initial boost. This shows the market adjusting to the initial tariff shock by expanding domestic production or lowering prices on foreign production.
The tariffs on Chinese-made goods also do not seem to have had much of an effect on consumer prices.
Appliance prices are up just two-tenths of a percentage point compared with a year ago. Prices for the narrower “major appliance” category, which was pushed up by the sharp rise in washing machines, have fallen 7 percent.
Clothing prices are down 1.2 percent compared with a year ago. Auto parts and equipment prices are up 1.8 percent compared with a year ago.
Soup, Beer, Veggies, Cars, and Trucks
Car and truck prices are perhaps the most important consumer item that tariff opponents claimed would be pushed up by the metals tariffs. But these have hardly moved. New car prices are up just one-tenth of a percentage point from a year ago. The prices of new trucks are 0.3 percent higher than a year ago.
Take the prices of soup and beer, Secretary Ross’s examples. The price of soup is up just 0.2 percent. The price of beer consumed at home is up just 1.2 percent compared with a year ago.
Of course, not all soup is canned. Beer is also sold in bottles. The government doesn’t track canned beer and canned soup separately. So it is possible that canned variations have seen more price inflation, offset by price declines in bottled beer and soup in cardboard containers. But that’s largely irrelevant from the consumer perspective since shoppers can easily just switch to the cheaper category.
There’s very little upward pricing pressure on beer consumed in bars and restaurants, which is notable because the price of beer kegs reportedly rose due to the aluminum tariffs. The price of beer consumed outside of the home is down 0.6 percent compared with a year ago.
“Pedaling” a False Narrative
So have tariffs failed to raise prices on anything consumers buy? Pretty much.
In earlier reports, it looks as if bicycles might be the exception. But bicycle prices have failed to move up by much. The China tariff on bicycles rose from 10 percent to 25 percent in May. That is on top of the pre-existing bicycle tariff that has been in place since imposed by President John F. Kennedy, recently around 11 percent (down from Kennedy’s original 25 percent). The price of bicycles and sports vehicles jumped 3 percent higher in September and rose another 0.5 percent in October. In November, prices rose another 1.2 percent, pushing the year-over-year price gain to 8.9 percent. But that big price jump has now reversed. Prices fell three-tenths of a percentage point in December and are up just 1.7 percent compared with a year ago, prior to the new tariffs.
Once again, the consumer price data has largely demolished the notion that tariffs are squeezing consumers. Phones, computers, and especially televisions have plummeted in price. Cars and trucks show no tariff pressure at all. Baseball mitts and other sports equipment are cheaper. Appliance prices are now below their year-ago levels. Toys are much cheaper. Major appliances have even fallen in price.
Tariffs had driven the price of washing machines higher, as intended. But those prices have come down. Bicycle prices alone appear to be indicating any significant tariff pressure.
That does not mean that prices will remain low or tariffs will never push prices up. But it demonstrates that even after over a year of tariffs, prices on consumers are not rising.
The low prices may indicate that the burdens of tariffs are falling on foreign producers and on intermediate goods producers. This can happen when export prices fall in reaction to tariffs, either because manufacturers seek to maintain market share by discounting their goods or because foreign currencies decline against the dollar.
The data is increasingly embarrassing for the Federal Reserve economists who claimed in two flawed studies that consumers were paying higher prices for goods subject to tariffs on steel, aluminum, or Chinese imports. Jason Furman owes Alan Tonelson and the audience for Munk Debates an apology for misinforming them.
Thanks to rising wages and a very low level of unemployment, Americans have more income going into the holidays. And we now know that tariffs have no pushed up prices for goods getting stuffed in stockings, placed under the Christmas tree, or given out to our sons and daughters, husbands, wives, and loved ones during the holiday season.