WASHINGTON (AP) – For months, both American consumers and businesses have been warned that President Trump’s tariffs, which impose a hefty import tax, will increase prices and negatively impact the US economy. Nevertheless, the latest economic reports tell a different story: inflation actually dropped last month and employment remained strong in April.
Presently, this discrepancy has left companies and consumers trying to make sense of expectations versus reality, especially in light of the current numerical data. Trump and his supporters quickly highlight that the trade war from his first term hasn’t led to a rise in overall inflation rates across the economy.
So, is it time to relax? Economists urge caution. Trump’s tariffs are significant, reaching levels not seen since the Great Depression of the 1930s. They remain unpredictable: the president may suspend them one day and announce new tariffs the next, keeping everyone on edge. Plus, these tariffs continue to ripple through the economy.
“We received a positive jobs report and a favorable inflation report, which is encouraging,” stated Ernie Tedesci, director of economics at Yale’s Budget Institute. “However, this shouldn’t lead to undue comfort for the upcoming months, particularly concerning inflation.”
For instance, Walmart recently notified customers that prices will increase on various products, from clothing to car seats. Some prices, such as those of bananas, have already surged.
Indeed, the ceasefire with China announced last Monday has significantly eased risks for the US economy, with both US and global stock markets rebounding last week. The US has lowered import taxes on China (the third largest source of imports for America) from 145% to 30%, leading to a better situation. In return, Beijing has decreased retaliatory tariffs from 125% to 10%. Economists at JPMorgan Chase predicted a recession due to these tariffs but have since upgraded their forecast.
Trump’s tariffs are the highest since the Great Depression
However, even with reduced tariffs from China, the Yale Budget Lab has reported that the costs of Trump’s trade war are significant. Rising prices are eroding the purchasing power of the average household by $2,800. Prices for shoes are expected to jump by 15%, while clothing costs are projected to rise by 14%. Tariffs are predicted to cut 0.7 percentage points from US economic growth this year, contributing to an increase in the unemployment rate (currently at 4.2%) by nearly 0.4 percent.
Trump imposed a 10% tax on imports from nearly every country worldwide, along with a 25% duty on cars, aluminum, steel, and many imports from Canada and Mexico.
The Yale Budget Lab estimates that Trump’s policy will elevate the average US tariff rate to 17.8%, the highest since 1934, up from around 2.5% when Trump took office. (Some economists have pegged the tariff rates between 14% and 15%.) During Trump’s first term, average tariffs increased by just 1 percentage point, despite significant media coverage. Currently, these tariffs have surged by a remarkable 15 percentage points, as noted by the Budget Lab.
We are just starting to feel the bite of these tariffs. In April, import tax revenues collected by US Customs and Border Protection reached only 4.5% tariff rates, Tedesci explained. This is partially due to delays in implementing customs duties, including technical glitches that hinder the collection process.
The full impact has also been delayed, as companies have rushed to import foreign goods before Trump’s tariffs took effect. Additionally, retailers and importers have largely halted the shipment of new customs duties for items such as shoes, clothing, toys, and other imports from China.
Tedesci, chief economist for President Biden’s Economic Advisors Council, noted that tariffs require time for their effects to reflect in higher prices. For instance, Trump’s tariffs on imported washing machines enacted in January 2018 resulted in higher appliance costs only by April that same year. Recent surveys by the Federal Reserve indicate that Trump’s imposed tariffs in 2018 and 2019 led to increased prices about two months later, suggesting consumers could soon start seeing higher prices again in June.
Consumers are unwilling to absorb higher prices
Since Trump’s time in office, conditions have altered. During his first term, companies generally passed on the entire cost of tariffs to consumers. Now, American consumers are still grappling with the effects of high inflation due to the Covid-19 pandemic, making them less willing to accept further price hikes.
“Consumers aren’t in the same position as they were in 2018,” Tedesci noted. A survey conducted by the Federal Reserve Banks in Atlanta and Dallas revealed that this time, many businesses are absorbing some of the tariff costs. The producer price index fell in April, indicating retailers and wholesalers have reported decreasing profit margins, thus suggesting they may be absorbing some of the tariff expenses.
The economic toll stems not only from tariff costs but also from the unstable approach the president has taken. For instance, the 145% tariff on China has recently been suspended for 90 days. Similarly, Trump suspended high tariffs that the US imposed on countries with which it has a trade deficit last month. Will these tariffs be reinstated?
Consumers are understandably concerned that tariffs could escalate prices. Consumer confidence surveys have dropped dramatically since Trump increased his tariff threats back in February. The results from the Conference Board’s Consumer Confidence Index indicate it has declined for five consecutive months, reaching its lowest point since the pandemic’s peak in May 2020.
Rising costs for coffee and holiday wreaths ahead
Snowy Owl Coffee Roasters in Sandwich, Massachusetts, which imports beans from Brazil, Nicaragua, Burundi, and other countries, is set to increase prices this week due to the 10% tariff. They plan to add 25 to 35 cents to each cup’s price.
“Taxes drive up costs and introduce significant uncertainty about a possible recession,” expressed Shayna Ferullo, co-owner of Snowy Owl. “We are closely monitoring our plans for the next year to remain efficient and operational.”
Ferullo is also considering renovations for her store in Brewster, Massachusetts (one of her three locations). She has chosen not to replace one departing employee and hasn’t laid off any of her 35 workers, but she is exploring automation to potentially lower labor costs.
Jared Hendricks, CEO of Village Lighting Co., stopped importing supplies from China last month. Now, with the US and China at an armistice, he is working to get products to the US in time for the holiday season.
He estimates it will take between 10-20 days to ship goods from China to the West Coast, followed by another 20-40 days for them to clear US customs and reach his company in Utah via Union Pacific Railroad. Given these anticipated delays, Hendricks is worried that his holiday decorations may not hit stores by September 1st.
In the meantime, he’s looking at how to absorb the $1 million tariff bill. He hopes that a 10% to 15% price increase will help cover these costs.
In the interim, he is considering a home loan to manage the tax expenses.
“We’re pressing on,” he remarked.
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d’Hynenzio reported from New York.
Source: apnews.com