Who’s feeling the pain of Trump’s tariffs?

In the bygone age that was 2024, America charged levies averaging just 2% on its imports of goods. In the new era of trade wars, it now has an “effective” tariff of over 16%, the highest since the 1930s (see chart 1). Rates look set to go even higher. On July 31st President Donald Trump signed an executive order that significantly raises tariffs on most of America’s trading partners, with the increases due to go into effect on August 7th. Duties on most products from the European Union and South Korea, which recently struck deals with America, will rise to 15%. India faces a tariff of 25%; South Africa, 30%; Canada, 35%. As we published this, Mr Trump seemed inclined to extend America’s tariff truce with China. But that still leaves the world’s second-largest economy facing levies of around 40% on sales to the world’s largest.

Who pays for these tariffs, in all their infinite variety? Most economists reckon that ordinary Americans will lose out, as prices in shops rise. Mr Trump and his coterie, by contrast, blithely insist that the rest of the world will shoulder the load by cutting their selling prices. So far, the evidence is giving the know-nothings a glimmer of hope.

Mr Trump’s critics in the economics profession have history and research on their side. Studies show that when a country imposes duties on its imports, its foreign suppliers often keep their prices roughly the same. The tariff is layered on top. So it was during the first Trump administration, which slapped tariffs on China and others. A study from 2019 found “complete pass-through of the tariffs into domestic prices of imported goods”.

Some foreign firms are taking a similar stance in response to Mr Trump’s new levies. In April Ferrari added up to 10% to the price of its cars. Britain’s Ineos said it would charge more for its Grenadier off-roader. Canon, a camera-maker, has warned dealers to brace for price increases.

But the broader pattern is more benign. There is, for example, surprisingly little evidence so far of tariff “pass-through” into inflation. In June America’s “core” consumer prices (ie, excluding food and energy) rose by 0.2% on the previous month, below the consensus estimate of 0.3%. Economists have found some evidence of tariff-induced price rises—in car parts, for instance—but they have had to look harder for it than they had expected.

What explains these surprising results? American firms, not consumers, may be paying for the trade war by accepting lower profits, suggests research by Deutsche Bank. Some firms also boosted inventories before the tariffs were implemented, allowing them to avoid raising their prices for now.

America’s foreign suppliers may also be sharing more of the load than they did in Mr Trump’s first term. Nintendo, a Japanese electronics firm, is keeping the American price of the Switch  2 games console at $449.99. Many Chinese manufacturers seem prepared to follow Nintendo and absorb duties: Fuling, a supplier of cutlery, says its clients expect it to shoulder “part of the increased tariff costs”. TIRTIR, a South Korean beauty brand popular with American Gen Zers, has signalled that it can absorb most of the tariffs. Games Workshop, a British manufacturer of war games, also seems resigned to taking the hit, warning investors that tariffs could reduce annual profits by £12m ($16m).

“We found tentative evidence that Korean auto exporters are shouldering the cost of higher US tariffs, at least for now,” wrote Kim Jin-Wook of Citigroup, a bank, in a recent note. The Bank of Japan tracks the prices of the country’s car exports to America. In yen terms, they have fallen by 26% in the past year. Some of that decline may reflect exchange-rate movements. An unchanged dollar price brings in fewer yen when the American currency is weak. But that only raises another question: why are Japan’s carmakers not raising their dollar prices more vigorously in response?

More comprehensive data point in a similar direction. The Economist assembled a series on export prices from a number of America’s largest trading partners, including Canada, Germany and South Korea. In the past exporters in these countries have been perfectly willing to raise prices: during the inflationary surge of 2021-22, they increased them by more than 15% over a 12-month span (see chart 2). Yet in the past year the average local-currency price of their exports has fallen by 3.6%. Nothing of the sort happened during Mr Trump’s first trade war.

Some economists have noted a disconnect between what foreigners report and what American importers say they are paying. For instance, it is hard to find much evidence of plunging prices for Japanese car imports. Economists at Citi speculate that the time it takes to ship a foreign product to an American port may explain the puzzle. It “implies a lag between falling export prices and when US import-price data would capture the decline”, they say.

Why might foreign suppliers be so forgiving? Some bosses worry more than before about the American consumer. With high inflation a recent memory, people already think that everything is too expensive. They have little tolerance for paying even higher prices. The opposite may be true of the foreign companies themselves. They are in a good financial position to withstand the tariffs. Aggregate margins of listed companies in emerging markets have become fatter over the past decade, increasing by over two percentage points. European firms have enjoyed similar gains. These companies can afford to take a small hit to profits, at least for now.

Before long America’s economy is likely to feel the pain of the trade war more acutely. Although some Chinese firms may have lowered their prices, these cuts are not nearly deep enough to offset the huge rise in tariffs they now face, points out Deutsche Bank’s research. In addition, foreign companies that have borne the costs until now may not be able to bear them for ever—especially if tariff rates keep ratcheting up. The president loves defying his adversaries, in the economics profession and beyond. But he is always his own worst enemy. ■