On Sept. 24, 5,745 goods imported to the U.S. from China will be hit with a 10% tax. Unlike previous tariffs, many of these items are things that are directly sold to consumers instead of raw materials, like luggage and seafood. By the end of the year, the tax on imports will rise to 25%.
Though analysts have speculated that some companies will choose not to pass on price hikes to consumers, instead taking a hit in margin to perhaps gain more market share, consumers are expected to foot the bill — not companies, and certainly not China.
The trade war with China has no end in sight, with the new escalations clouding talks and cooperation — China responded with new tariffs of its own. It’s a game of chicken with two leaders looking to project power, and neither has blinked yet.
But despite the poor outlook, few believe these tariffs will last forever. Assuming they don’t, what happens next? If the tariffs are removed in mid-2019, do prices fall 25%?
“Once firms have priced into the market whatever their costs are, the tendency will be — if the tariffs go down — to keep the prices at about the same level,” Gary Hufbauer, nonresident senior fellow at Peterson Institute for International Economics, told Yahoo Finance in July. “In other words, to pump up their margins.”
In some competitive sectors, in which many companies vie for customers in a race to the bottom, the market will allow prices to fall back to their proper levels. This is the benefit of an efficient market.
But not every market experiences the robust competition necessary to provide the downward pressure to push prices back to pre-tariff levels. In some of the 5,745 product categories defined, consumers will doubtless experience inflation as pre-tariff prices fail to return.
If prices do not fall after tariffs are removed, the tariffs will have come at a much higher price than advertised: a permanent price hike.