Tariffs and retail prices: what consumers need to know

On By Pranco

Tariffs on retail goods generally have no direct impact on the final price consumers pay.

When products are brought into the US, the tariff is calculated based on the declared value of the goods at the point of import, and not on the retail price at which they are sold.

This stated value excludes additional costs such as labor, marketing, logistics, rent and the profit margin that retailers add. As a result, the price on the shelf can be significantly higher than the tariffed import value.

For example, the surcharge on expensive items such as cars can be relatively modest, around 5%, while luxury goods can see a surcharge of up to 500%. However, most consumer products are typically marked up by more than 100% over their import value.

Sourcing is never fixed:

Consumers worry that retailers will simply pass on the cost of tariffs in terms of wholesale costs. The most likely answer is that companies will look for cheaper suppliers, sourcing countries or domestic manufacturers. Sourcing is not static or fixed.

What will importers do to respond to the tariffs?

Importer strategies:

  • Absorptive Tariffs: Importers can pay the tariffs from their profit margins to stabilize consumer prices.
  • Sourcing through alternatives: They could move production to countries with more favorable trade agreements with the US
  • Raising prices: As a last resort, if neither absorbing the costs nor switching suppliers is feasible, the price for the consumer may increase.

As importers discover cheaper alternatives, they will shift their purchasing to maintain profitability. Otherwise, they must decide whether to absorb the costs or pass them on to consumers, depending on how much the market will tolerate the price increase.

Impact on suppliers:

Manufacturers, especially those exporting to the US, are faced with similar decisions.

The US is the largest consumer market in the world. A significant drop in demand due to high tariffs can prompt suppliers to lower their prices to remain competitive, offsetting some or all of the costs of the tariffs.

Foreign government subsidies to their manufacturers:

Some foreign governments are likely to subsidize their manufacturers to ensure that they do not lose U.S. market share to foreign or domestic competitors. For decades, U.S. manufacturers and policymakers have complained about China subsidizing the manufacturing sector to steal market share from U.S. domestic manufacturers. This means that consumer prices can remain the same, while tariff costs are offset by reducing the foreign manufacturer’s price and margin.

Market dynamics:

Ultimately, the level of demand sets a ceiling on how much prices can rise. If prices become too high, sales will decrease.

Strategic rate use:

The imposition of tariffs, especially on countries like China, strategically pushes companies to diversify their supply chains by finding suppliers in countries with better trade relations or by boosting domestic production.

As a result of these tariffs, as demand for Chinese goods declines, Chinese manufacturers are forced to lower their prices or risk losing market share, potentially leading to business closure.

Supply chain flexibility:

The adaptability of modern supply chains is crucial. Over time, supply sources can be diverted to areas of lower cost and higher reliability. This flexibility is not a weakness; it is an inherent strength of the economy, enabling more resilient and efficient distribution of goods around the world.