Gail Ross can tell you two things with certainty: Americans, not the Chinese, are paying for President Donald Trump’s tariffs. And second, most of the costs were absorbed by U.S. companies, which is why consumers haven’t seen excessive sticker shock at stores.
Ross is chief operating officer at Krimson Klover, a women’s clothing brand headquartered in Colorado. Like many U.S. business leaders, Ross has a stack of import duty bills on her desk that show the hefty taxes her company has been paying for every item coming from China.
She was so frustrated about Trump’s repeated assertion that the Chinese are paying the cost of the tariffs that she made bumper stickers saying “China is paying for the tariffs like Mexico is paying for the wall” and gifted them to friends for Christmas.
At the same time, Ross also warns friends to be skeptical of claims that the tariffs are triggering massive price hikes on shoes, clothing, toys and more. Headlines last year proclaimed Trump’s tariffs could cost the typical American family $1,000 more a year. The eye-popping number came from a JPMorgan analysis that assumed the full cost of the tariffs would be passed on to consumers, which is what is generally taught in introductory economics classes.
But that is not what’s been happening. The evidence so far indicates that most American firms passed only a fraction of the cost increase on to consumers — more in the range of $100 per family a year.
Krimson Klover’s story is illustrative of just how disruptive the trade war has been for businesses and why it has been more difficult for companies to raise prices in today’s highly competitive marketplace.
The company raced to get all of its apparel from China into California ports before a 15% tariff kicked in on Sept. 1. Fortunately for Ross, the vast majority of the fall and winter collection did arrive before the deadline, avoiding Trump’s tariffs and helping to keep prices on sweaters, leggings and skirts down for the season.
But some items did face tariffs. So far, the cost has been paid for like this: Her company ate about 6%, the Chinese factories ate about 6% and consumer prices went up about 3%. That modest price hike is similar to what has happened to other products that faced tariffs. While some products like washing machines or niche, hard-to-source items like exotic goldfish, did see larger price increases, the typical increase was in the low single digits.
“We got lucky. There was a huge scramble. We did a lot of work to mitigate that price increase,” Ross said. “We probably got 80% of our product in the United States by the end of August.”
The partial trade deal Trump signed this past week with China keeps all the existing tariffs in place, meaning the pain isn’t over for U.S. companies. Business owners are warning that consumers could feel more of the burden going forward.
Many say they had signed contracts with wholesalers and large retailers, including Amazon and Walmart, for the holiday season that locked in prices. They were unable to hike right away, but it is likely to be different for the spring and summer and certainly Christmas 2020.
“If this trade war continues, prices are going to (go) up,” Ross said.
For Ross, the only relief is that the tariffs that went into place Sept. 1 are going to be cut in half to 7.5%. But that break doesn’t kick in until next month. Krimson Klover’s spring and summer lines are currently sitting on six ships at various points in the Pacific Ocean. All are slated to arrive before the tariffs drop.
For now, companies that import heavily from China have been focused on cost-cutting to offset tariffs. Krimson Klover has shelved plans to add more employees until it has more clarity on the taxes. Nationwide, hiring slowed in 2019 and there was a noticeable decline in job openings as many executives made the same calculation that Ross did.
There’s a reason why companies view price hikes as a last resort, said Fred Ferguson, vice president of government and industry relations at Vista Outdoor, which owns various sports and recreation companies. He pointed to what happened at Camp Chef, one of their brands which makes grills for camping and other outdoor situations.
Camp Chef had to raise the price of one of its bestselling stoves by $20 because of tariffs, and the company couldn’t find another comparable supplier. Sales plummeted, and the company was forced to lay off employees for the first time in the brand’s 30-year history.
“We know based on our data that when these prices go up, it’s not going to sell,” Ferguson said.
A combination of competition, cost-cutting and major retailers insisting on holding the line on prices have kept costs in check so far. That’s been good news for consumers.
Numerous academic studies have concluded that U.S. businesses and consumers have paid nearly the full cost of Trump’s tariffs. These economists have mainly looked at customs levy data showing who is handing over the money at the U.S. border to bring in the goods. This kind of analysis does not offer clarity on how much of the burden falls on consumers versus businesses that choose to absorb the cost.
But a recent study by economists at Harvard University, the University of Chicago and the Federal Reserve Bank of Boston went a step further, examining data from two large retailers on prices of similar goods, some of which face tariffs and some that do not. The economists found a “quite modest” price difference, suggesting that U.S. companies and retailers are eating a lot of the costs and making lower profits.
The price hike for affected dishes, furniture, linens, toaster ovens, towels and umbrellas was less than 1%, the study found. And the price for electronics only went up by 1.4%.
Trump has urged U.S. companies to stop producing in China and move elsewhere — preferably back home.
There’s early evidence that larger companies have started shifting production to other countries. Imports from China fell in 2019 but jumped from Taiwan and Vietnam, according to an analysis in December by the Federal Reserve Bank of St. Louis.
Ever since the tariffs struck some of Krimson Klover’s bags last spring, Ross has been searching for manufacturers outside China. It hasn’t been easy.
Her first hunch was to look at Mexico. But just as discussions picked up there, Trump threatened to impose significant tariffs and shut down the entire U.S.-Mexico border to punish Mexico for not doing enough to thwart illegal migration. He ultimately didn’t do that, but it was enough to make Ross reconsider. She found a manufacturer in Denver that could make some items but it would take a year to produce what a Chinese factory could make in four months.
Krimson Klover is now doing a trial run with a small factory in Eastern Europe for its fall and winter 2020 merino sweaters, but Ross has been aghast as Trump threatens to sock Europe with tariffs.
Preparations are already under way by Trump’s chief trade negotiator to tariff certain European products “up to 100 percent” in retaliation for years of European state subsidies for airline maker Airbus, which the World Trade Organization recently ruled were illegal. Some of Krimson Klover’s products are on that proposed tariff list.
“I just looked at my boss and said, what am I going to do?” Ross said. “We pulled our product from China to go to this little factory in Europe and now we have — maybe, it’s unclear — new tariffs.”