The American consumer is going to pay the Trump tariff

Economists say that the average family will pay $2,600 for a 20 percent tariff, and the White House and Vice President Kamala Harris say it will be more, closer to $4,000, and it will hit the poorest families the hardest. Why might it be closer to the higher figure, and who would end up paying it? Well, one reason may be that these figures do not include domestic sellers raising their prices. It is worth exploring the question of who would bear the tariff, and why it might add to an average family’s cost of living.

Children are starting the school year, and most will need new shoes. The United States moved on from producing shoes years ago. Some 96 percent or more of all shoes sold in the United States are imported. Foreign sellers know Americans need shoes. They might on the high end have enough margin to absorb some of the new tariff if it would help their sales. Were some consumers in the market for a high-end fashion shoe, they might want to buy Jimmy Choo, Dolce & Gabbana, Emporio Armani, or Prada (I had to look those names up). You might think that those fashion houses would be willing to absorb some or all of the tariff. However, those few shoppers who can afford those name tags presumably want those brand names on the shoes they wear, so the foreign producers have no incentive to cut their prices.

More important is that sellers have little reason to offer the US market a lower price when they can sell at full price elsewhere, which is most of the world. So why give US consumers special treatment? The evidence indicates they won’t. At the lower priced, high-volume end of the market, where shoes are the cheapest, the market is highly competitive, so there may be little profit margin to cut. Competition is a key explanation for why US sellers can’t simply absorb and instead have to pass on cost increases, like those the tariffs will impose, to consumers. Even the retailers can’t help consumers because their average profit margin is below 3 percent. And if they lose that, they can’t pay their workers. So, there is no help there. No, you, the consumer, get to pay the new tariff.

Now, take the case of tomatoes. The US climate is not the best for growing tomatoes, not year-round in any event. We get a lot of them from Mexico. The US Department of Agriculture reports that while greenhouse tomato production in the United States has expanded, imports accounted for an estimated 88 percent of the domestic greenhouse tomato supply in 2023. Under Trump’s plan, importers will have a new cost, the 20 percent Trump tariff, and that will raise prices on imported tomatoes. Domestic producers need not be seen as greedy if they raise prices as well, as they are faced with increased demand for their untaxed (un-tariffed) tomatoes. The market is the way supplies are allocated; when competing sources become more expensive, so the domestic tomatoes start to sell for more, until demand and supply reach a new equilibrium at a higher price after imports become more expensive due to the increased cost of the tariff.

Imported orange juice accounts for just 25 percent of the US market, so maybe there is relief to be found there. The United States is the world’s largest importer of orange juice. Presumably, before the tariff, American processors already bid down the price of foreign juice to the extent that they could, since, for example, Brazil and Mexico compete to be the principal supplier to the US market. The bottom line: There is not much help for US consumers to expect from the foreign producers somehow absorbing the tariff.

Going back to our original back-to-school example, imports of clothing account for 98 percent of consumption in the United States. It is a highly competitive market. The Trump proposal is a 20 percent tariff on all imports (except from China, which gets a 60 percent tariff). Again, the retailers cannot absorb this increase in costs; the margins on retail sales are too low. Since the Trump tariffs apply to all countries, not just some, there is no way for the consumer to shift from one country as a source to another, and there really isn’t anything like current domestic supply. The American consumer might, if used to internet shopping, find individual sellers who can ship directly from abroad. A substantial and growing amount of apparel is shipped direct under a low-value (de minimis) tariff-free small shipment carve-out (because it is expensive and inefficient for Customs to spend a lot of time and energy figuring out tariffs on small shipments and subjecting consumers to a lot of red tape filling out forms).

So, who bears the tariff? You, the consumer does, just as you know you pay the state sales tax when you reach for your credit card at the cash register. Everyone pretty much understands this about taxes on goods and services.

Most American school children know the story of the Boston Tea Party. In 1773, some brave residents of Boston threw British tea into the harbor rather than pay a tax on the tea. Had Donald Trump been there, he could have tried to tell these patriots that a tax on an import is paid by the foreign producer, not the colonial consumers, so no worries. These colonists would not have risked prison or being shot rather than pay the tax. But they knew who would pay the tax, and it was not the British tea merchants.

Trump tariffs are a bad policy idea that would have to be paid for by American consumers.