The Trump administration’s trade policies are not raising prices for U.S. consumers.
Prices for goods in the U.S. dropped 0.4 percent in June even as tariffs on $200 billion of Chinese imports rose from 10 percent to 25 percent, the Labor Department said Friday. Excluding the volatile food and energy categories, prices were unchanged from the prior month.
So who is paying for the tariffs? We know the U.S. government has collected billions in tariffs, so it is clear that someone is footing the bill. But keep in mind that when journalists and lobbyists claim, “tariffs are taxes on consumers,” this is inaccurate.
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, which have been rising faster than inflation, which means labor costs are rising faster than prices. Conversely, 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.
In addition, the Chinese currency has depreciated over the past year, which makes imports from China less expensive. And there is anecdotal evidence that Chinese manufacturers are slashing prices in an attempt to hold on to market share in the U.S.
“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 last month. “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
The most recent evidence against what trade expert Alan Tonelson calls Tariffmageddon scaremongering comes from Friday’s release of the producer-price index, which mostly measures the prices businesses receive for their goods and services. This rose a seasonally adjusted 0.1 percent in June from a month earlier, the Labor Department said. From a year earlier, the producer-price index increased by 1.7 percent.
The unchanged prices for goods less food and energy categories is especially notable because the prices for services is showing some healthy signs of inflation, rising 0.4 percent for the month. Goods less food and energy is more or less the “tradeable sector” of the economy and the broadest category where tariffs would show up if they were to hit consumers.
What this suggests 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.
Durable goods, products purchased by consumers and businesses that are expected to last three-years or more, are a good place to look for signs of tariff-led inflation. The producer-price data shows that prices of raw materials used in durable fell 0.1 percent in June, the third straight monthly decline. Compared with a year ago, prices are down 3.3 percent. Components for durable goods, the prices of parts that go into durables, were flat in June and are up 1.7 percent from a year ago. “Final demand” durable good prices–those that get reflected on store shelves–rose 0.1 percent in June and are up just 1.4 percent compared with a year ago.
The nondurable goods category is where we might see signs of the China tariffs. Materials prices here rose 0.2 percent in June, a deceleration from the 0.8 percent rise in May. Compared with a year ago, prices are d0wn 3.6 percent. Parts rose 0.3 percent for the month and are up just 1 percent compared with a year ago. The final demand category shows prices flat in June and up 3 percent compared with a year ago.
So the picture drawn by these broad categories is one of no inflationary pressure in durable goods, low and declining inflation in nondurable goods, and no sign of tariff pressure at all.
Metals Tariffs Haven’t Raised Prices on Planes, Trains, or Automobiles
What about specific items? Still no signs of tariff price pressure. Start with products that were predicted to rise in price because of the metals tariffs. Specifically, cars and trucks.
“U.S. President Donald Trump’s steel and aluminum tariffs will boost car prices by hiking commodity costs for manufacturers, automakers have warned,” Reuters reported last year.
That has not happened. Car prices were flat in June and are up just 0.7 percent from a year ago. Prices of light trucks–which include all those SUVs that so many American families love–were flat in June and are down 0.2 percent from a year ago. That’s not great news for automakers but it certainly means they were wrong when they predicted tariffs would put up prices.
Car and truck parts? Up just 0.1 percent in June and up just 0.6 percent from a year ago. Campers and recreational trailers? Up 0.1 percent in June and up just 1.7 percent from a year ago.
Seeing a pattern yet? Let’s look at some heavy duty steel and aluminum products. Aircraft prices rose 0.2 in June and are up 2.2 percent from a year ago.
Perhaps the prices of aircraft have been held down the trouble with Boeing planes. So let’s look at the prices of ships in June: up 0.5 percent for the month and 1.4 percent annually, a slight acceleration from earlier in the year. Railroad equipment was fell in June and prices are up 2.2 percent for the year.
Some of these metals heavy items, including auto parts and ships, are actually doubly subject to tariffs because they were hit by both metals tariffs and China tariffs.
Prices for Consumer Goods Are Not Rising Due to China Tariffs
Furniture is one of the biggest categories of consumer items that were hit by the China tariffs. Household furniture prices, however, were flat in June and up 2.2 percent for the year.
Soaps and detergents imported from China saw their tariffs rise from 10 percent to 25 percent but prices were up just 0.3 percent in June and 0.4 percent compared with a year ago.
A lot of categories of home electronic equipment were hit with the higher China tariffs. Prices here were fell 0.4 percent in June. Compared with a year ago, prices are up just 0.8 percent.
Household appliances had been pushed up by a big jump in the price of washing machines following a specific tariff intended to counteract anticompetitive dumping that had depressed prices. But this has faded. In June, household appliance prices fell 0.1 percent. For the year they are up 4.1 percent.
Pricer appliances, however, are somewhat offset by the fall of computer prices. Computer prices fell 0.8 percent in June and are down 5.5 percent for the year.
A lot of the materials used in textile and clothing manufacturing in the U.S. got hit with China tariffs, including man-made textiles like rayon, nylon, and polyester. Synthetic fiber prices, however, fell 0.1 percent in June, after falling a full 1 percent April and coming in flat in May. Compared with a year ago, they are up 2.2 percent for the year. Yarn and thread prices were flat in June and are down 1.7 percent from a year ago. Finished fabric prices rose 0.1 percent in June and are up 3.1 percent compared with a year ago.
And the tariffs on these are not pushing up prices for clothing or textile home furnishings. Women’s clothing prices rose 0.1 percent in June and are down 1.6 for the year. Men’s clothing prices were flat in the month and are up 1.9 percent for the year.
Margins Shrink But Prices Stay Low
Tariffs may have raised prices for businesses further out on the production chain but these are not getting passed on to consumers in the form of higher prices for final goods, according to the data. Most likely, businesses are absorbing the higher costs because they lack pricing power in the very-competitive user consumer market. Who wants to give up market share Jeff Bezos or Walmart by hiking prices on store shelves?
Evidence for this in the producer-price index comes from a category called “trade services.” Unlike the rest of the index, which measures prices received, trade services is a measure of mark-ups, the difference between what a retailer or wholesaler paid for inventory and what they sold it for. Margins for China-tariffed TV, video, and photographic equipment are down 14.9 percent for the year but showed a bit of strength month-to-month, rising 0.4 percent in June. Furniture store margins told the same story: up 1.7 percent for the year after rising 0.3 percent in June. Hardware stores, which carry a lot of tariffed Chinese goods, saw margins fall 1.1 percent in May for a 5.5 percent annual decline, showing no signs of improving profits.
If you go even further out in the supply chain you can see even more evidence that the impact of metals tariffs on costs is now fading from the data and that these costs never got passed through to consumers. Prices of steel mill products, which are an intermediate good used to produce consumer goods, fell 2.0 percent in June. Prices for steel mill products also fell 0.6 percent in May and 1.7 percent in April, held flat in March, and fell 3.2 percent in January. On an annual basis, which now means comparing prices of products immediately after the steel tariffs and more than a year after they were imposed, prices are down 3.4 percent.
Just two months ago, steel mill prices were still showing a steep 5.8 percent increase on an annual basis. In February, prices were up 12.6 percent compared with the year prior and in October they were up 18.6 percent. In other words, the tariffs are not inflationary in the ordinary sense of the word. They resulted in higher intermediate prices paid by businesses but did not create ongoing price pressure and they were not passed on in any meaningful way to consumers.
It’s also likely that businesses have been better able to absorb the higher prices of imported goods or tariffed metals because last year’s massive cut in the corporate tax rate gave a big boost to after-tax profits. That softens the blow of a slight compression of pre-tax margins.
The Tariff Hoax Debunked
One of the reasons so many economists and journalists claimed, without evidence, that the Trump administration’s tariffs would be passed on to consumers is that they assumed the purpose of tariffs was to raise domestic prices to boost the bottom lines of domestic manufacturers. But that was not the goal of the China tariffs at all. These were aimed at pressuring China to abandon its unfair and illegal trade practices. Metals tariffs did aim to boost the bottom line of U.S. steel and aluminum producers but this can be accomplished by squeezing margins of producers of intermediate products–margins that had been inflated by metals made artificially cheap by China dumping on the global market–without harming consumers.
Time will tell if those who predicted higher consumer prices based on their assumptions will modify their views based on the data.