History tells us who pays for customs hikes
President Trump's new Along with a 25% tariff on Mexican and Canadian goods and a 10% tariff on Chinese importssent the market on Wild Ride on Tuesday.
Stocks began the day with a sharp drop and then an impressive recovery, but ended the session close to the lowest of the day. Still, the damage was almost non-devastating. The Dow was down 1.55%, with the S&P 500 at about 1.2% and the NASDAQ composite at 0.35%. that's right Bad day for investors It's long for US stocks, but it's not outside the normal ups and downs of the stock market.
The trader works on the floor of the New York Stock Exchange (NYSE) on March 4, 2025 (Timothy A. Clary/Getty Images via AFP)
Why did the market have no more negative reaction to tariffs? Perhaps the reason is that we saw the evidence. The impact of customs duties And they weigh far fewer consumers than tariff-hating critics.
Research published in AER: Insights Economists Alberto Cavallo, Gita Gopinath, Brent Neiman and Jenny Tang analyzed the impact of tariffs imposed in 2018, and while import prices rose roughly proportionally directly to tariffs, The impact on consumer prices was much more limited. Their study measured how to measure tariffs translated from import costs to shelves using detailed microdata and retail price tracking from the Bureau of Labor Statistics. The findings show that US importers face higher costs; US retailers have absorbed much of the burdenoften reduce profit margins rather than handing the consumers higher costs.
In this study, in many cases, Retailers adjust their pricing strategies rather than raising prices immediately Regarding items with customs duties. Using data from two large US retailers, researchers observed that, on average, the retail prices for these products only rose by about 0.7%, even if tariffs increased the cost of certain Chinese imports by 20%. This suggests that the retailer has chosen Instead of risking losing customers, sacrifice some of the profit margins By passing the full cost.
Free market prices were adjusted, and Chinese prices were not
Furthermore, the study highlighted important differences in how exporters responded to tariffs. Chinese exporters operating in a state-controlled economy with heavily government subsidies did not lower prices in response to US tariffs. in contrast, US exporters facing retaliatory tariffs have cut pricesmaking products more competitive in foreign markets. This raises an interesting question. Can companies in free economies like Mexico and Canada respond to today's tariffs by adjusting their pricing strategies? If so, it could alleviate some of the expected increase in costs for American importers.
Another important factor that helped businesses manage tariffs in 2018 was Corporate tax reductionlowered the rate from 35% to 21%. This provided businesses with additional flexibility to absorb tariff-related costs without the need to raise prices. Through a similar approach today (target tax reduction or regulatory relief), it can help businesses stay competitive while adapting to the new trading environment.
The history of tariffs suggests its early days Fear of widespread rise in consumer prices was exaggerated. Import costs rise, but competitive pressure within the retail sector limits how much of that increase is passed. Furthermore, shifts in supply chain and pricing adjustments by exporters can play an important role in mitigating the impact of tariffs.
