Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy 
Beginning in 2018, the United States has made many significant changes to its trade policies. The most notable change has been the imposition of tariffs ranging from 10 to 50 percent on imported goods such as washing machines, solar panels, aluminum, steel, and on roughly $250 billion worth of goods from China. Future tariffs have been announced on an additional $300 billion of Chinese goods. Canada, China, the European Union, and Mexico have responded to these policies by imposing retaliatory tariffs on US goods. Not since the 1920s have the world’s largest economies enacted measures that make it far more costly to buy products from each other. This paper uses product-level price data from the Bureau of Labor Statistics and online price data on millions of individual goods from two large multi-channel US retailers to gauge the impact that these trade policies have had on prices measured at the US border and at the US retail level.
Key Findings
- Looking at US imports of steel products and US imports from China, whether using aggregated price indices or regression estimates that track variation across individual products, the respective analyses show a similar pattern for the 12-month price response to the US import tariffs imposed in 2018 and 2019. The tariffs exhibited almost a complete passthrough into the total prices paid by importers, so the incidence of the tariffs (meaning who bears the ultimate cost of these policies) is almost entirely on the United States.
Using the same data, methods, and time period, after one year the passthrough rates of exchange rate changes to import prices are between 25 and 35 percent, which is a much lower range than the almost 100 percent tariff passthrough rate into total import prices. This result is contrary to the assumption commonly made in standard models used in the trade and international macroeconomics literature, which posit that there is a symmetric price response to these two types of shocks. This novel finding suggests that caution should be applied when interpreting the results obtained from these models. It is possible that the findings from the standard models might better apply to longer-run outcomes or be amended to allow for more uncertainty or mean-reversion in the shocks, which are features that might explain the contrary result in this paper. Furthermore, as a practical matter, this asymmetric passthrough suggests that the Chinese renminbi’s recent depreciation did not offset the impact of the tariffs on US importers. - An analysis of the pricing dynamics on various categories of goods affected by the tariff policy shows that there is mixed evidence of passthrough to retail prices—and hence to US consumers. In more aggregated price indices, import tariffs seemingly exhibited a rapid and high passthrough to washing machines. However, there is significant heterogeneity in the price dynamics across different washing machine brands, with the same post-tariff increases in inflation rates for both US and imported brands. Looking at other goods categories significantly impacted by the tariffs on Chinese goods, there is a slower but ultimately high passthrough to the retail prices of tires and handbags and a sustained but low passthrough to bicycle prices. While the tariffs have resulted in higher retail prices on some products, the overall effect on US retail prices is much more muted than what was found for total import prices. After a year, a 10 percentage point tariff increase on a good is associated with a 0.44 percentage point increase in that good’s price relative to other goods in the same sector that are not affected by the tariffs. A comparison of US and Canadian prices both at the aggregate and retailer level suggests that retailers have not increased profit margins on goods unaffected by tariffs in order to offset the margin reduction on the goods that are affected. This result implies that at least for the first year or so that these tariffs have been in effect, US retailers have absorbed much of the impact by accepting lower profit margins on the affected goods.
- Front-running behavior to build up inventories may have muted the initial impact of the tariffs on US retail prices. Data from maritime bills of lading shows that two major US retailers increased their volume of imports from China immediately after the tariffs were announced but before prices went up. US importers also partly adjusted by shifting their supply chain from China to other countries not subject to new tariffs.
- Using data from the International Trade Administration on retaliatory tariffs imposed on the United States, the authors find that US exporters significantly reduced their prices in response to the foreign tariffs, and by a much greater amount than foreign exporters adjusted prices when faced with US tariffs. This finding is explained by classifying the types of goods affected by the tariffs. The US export goods that were affected by the retaliatory foreign tariffs are less differentiated, such as agricultural products, and hence more readily available substitutes exist for them, so exporters had to adjust their prices more deeply. US exports to China are the main driving factor behind these results. In contrast, Chinese exports to the United States are more differentiated, and hence less substitutes are available, which explains why the tariffs passed through almost entirely to the prices US importers paid for these goods.
Exhibits
Implications
This paper augments a rich theoretical literature on tariff policies by providing an empirical counterpart showing how large economies respond in practice to the imposition of tariffs. In terms of the current trade war, the empirical evidence shows that by accepting lower profit margins on the foreign goods affected by the US tariffs, US retailers have so far absorbed a significant share of the price increases on these goods that passed through almost completely at the US border. This finding suggests that a more complete understanding of the full supply chain effect, beginning from the “at-the-dock” prices faced by importers and exporters to the impact on final retail prices, is important to quantify the full implications of any trade policy.
Tariff passthrough, at least in the early period when these policies are in effect, can differ based on the particular product category and how differentiated are the goods that are affected by the tariffs. Arguing that this first year of data only shows the initial short-run global impact of these trade policies, the authors speculate that if these tariffs remain in place for longer, pricing pressures on US retailers will likely rise. This expectation implies that in the future, some combination of greater passthrough into US consumer prices or a larger reduction in US ex-tariff import prices.
Abstract
We use micro data collected at the border and at retailers to characterize the effects brought by recent changes in US trade policy—particularly the tariffs placed on imports from China—on importers, consumers, and exporters. We start by documenting that the tariffs were almost fully passed through to the total prices paid by importers, suggesting that the tariffs’ incidence has fallen largely on the United States. Since we estimate the response of prices to exchange rates to be far more muted, the recent depreciation of the Chinese renminbi is unlikely to alter this conclusion. Next, using product-level data from several large multinational retailers, we demonstrate that the impact of the tariffs on retail prices is more mixed. Some affected product categories have seen sharp price increases, but the difference between affected and unaffected products is generally quite modest, suggesting that retail margins have fallen. These retailers’ imports increased after the initial announcement of possible tariffs, but before their full implementation, so the intermediate pass-through of tariffs to their prices may not persist. Finally, in contrast to the case of foreign exporters facing US tariffs, we show that US exporters lowered their prices on goods subjected to foreign retaliatory tariffs compared to exports of non-targeted goods.