By Francesco Canepa and Howard Schneider
FRANKFURT/WASHINGTON (Reuters) -U.S. businesses and consumers will be hardest hit by the country's new import tariffs, early indications show. These contradict President Donald Trump's claims and complicate the Federal Reserve's fight against inflation.
Trump famously predicted that foreign countries would pay the price for his protectionist policies, betting that exporters would absorb those costs just to maintain a foothold in the world's largest consumer market.
But academic studies, surveys and corporate commentary show that for the first months of Trump's new trade regime, it will be US companies that foot the bill and pass some of it on to consumers – with more price increases likely.
“The majority of the costs appear to be borne by American companies,” Harvard University professor Alberto Cavallo said in an interview to discuss his findings. “We have seen a gradual pass-through to consumer prices and there is clear upward pressure.”
A White House spokesperson said that “Americans may face a transition period of tariffs,” but that the costs “will ultimately be borne by foreign exporters.” Companies diversified supply chains and moved production to the United States, the spokesperson added.
WHO EATS THE RATES?
Cavallo and researchers Paola Llamas and Franco Vasquez tracked the prices of 359,148 goods, from carpets to coffee, at major online and brick-and-mortar retailers in the United States.
They found that imported goods have become 4% more expensive since Trump began imposing tariffs in early March, while the price of domestic products rose 2%.
The biggest import increases were seen in goods that the United States cannot produce domestically, such as coffee, or that come from heavily punished countries, such as Turkey.
While these price increases were substantial, they were generally much smaller than the tariffs for the products in question – implying that sellers were also absorbing some of the costs.
Still, U.S. import prices, which do not include tariffs, showed that foreign exporters have raised their dollar prices and passed on some of the dollar's depreciation against their currencies to their U.S. buyers.
“This suggests that foreign producers are not benefiting much, if at all, from U.S. tariffs, consistent with previous economic research,” researchers at Yale University think tank Budget Lab said in a blog post.
National export price indices paint the same picture. The cost of goods exported by China, Germany, Mexico, Turkey and India have all risen, with Japan the only exception.
THE FULL IMPACT OF THE RATES HAS YET TO BE FEELED
The adjustment to Trump's tariffs — a still-incomplete set of levies that pushed import taxes from an average of about 2% to an estimated 17% — is still ongoing. It is believed to take months longer as exporters, importers and consumers jostle over who will pay duties worth about $30 billion a month.
“We shouldn't expect this to be a one-time jump, but companies are trying to find ways to soften the blow” and stretch the price increases over time, Cavallo added.
European automakers have so far tried to absorb more of the price impact, but consumer companies such as Tide detergent maker Procter & Gamble, Ray Ban maker EssilorLuxottica and Swiss watchmaker Swatch have raised prices.
About 72% of companies in Europe, the Middle East and Africa tracked by Reuters signaled price increases since Trump's trade salvos began, a Reuters tracker shows. Only 18 companies have warned about profit margins.
Separate Reuters analyzes of e-commerce websites Shein and Amazon already showed robust price increases for Chinese products sold in the United States, ranging from clothing to electronics.
China's so-called “anti-involution” policy, which encourages manufacturers to reduce competition and even reduce capacity in key sectors, could add fuel to the fire by curbing the supply of goods such as solar equipment.
All of this has paved the way for higher inflation in the United States. The Fed cut its key rate last month on concerns that the labor market was weakening, but policymakers are divided over whether rate-driven inflation is likely to ease.
The Fed's newest governor, Stephen Miran, on leave from the Trump administration, insists the rates are not inflationary and has played down concerns about what he called “relatively small changes in some commodity prices.”
According to a back-of-the-envelope calculation from the Boston Fed, the rates would increase core inflation by 75 basis points.
Fed Chairman Jerome Powell said rates may represent 30 to 40 basis points off the latest core inflation rate of 2.9%, but the effect should be “relatively short-lived.”
The Peterson Institute for International Economics estimated that inflation would be 1 percentage point higher in the coming year than if rates had not increased, but then fall back.
GLOBAL TRADE SEEN SUFFERING AS TARIFF BITCH
However, the rest of the world has no reason to celebrate.
As American consumers struggle to keep up with rising prices, demand for exports is likely to slow. An S&P Global survey of purchasing managers at companies around the world found that new export orders have shrunk at an accelerating pace since June.
European Union exports to the United States fell 4.4% from the previous year in July, the last month for which data was available, and in the bloc's former powerhouse Germany they fell 20.1% in August.
The World Trade Organization also cut its forecast for global merchandise trade volume growth next year to just 0.5%, citing a delayed impact from US tariffs. US shipping data, tracked by German think tank Kiel Institute, also showed a clear downward trend.
While all this may partly reflect the strong early delivery of orders earlier this year in anticipation of tariffs, it also leads to caution about the trade outlook.
Dutch bank ING expected a 17% drop in goods exports from the EU to the US over the next two years, costing the bloc 30 basis points of GDP growth.
“The expected impact of the American tariffs has not yet materialized,” said Ruben Dewitte, economist at ING. “We expect these effects to become more visible in the coming months.”
(Additional reporting by Marius Zaharia in Hong Kong; Jarrett Renshaw; Juveria Tabassum and Arriana Mclymore in Bengaluru; Adam Jourdan in London; Editing by Mark John and Andrea Ricci)
