Most investors and observers around the world were stunned by the scope and ambition of President Trump’s newly announced trade policies centered on sweeping import tariffs. The measures were unusually large in scale and broad in application — a dramatic departure from the norms of recent decades. And at first glance, it felt as though […]
Most investors and observers around the world were stunned by the scope and ambition of President Trump’s newly announced trade policies centered on sweeping import tariffs.
E. Keith Wirtz
The measures were unusually large in scale and broad in application — a dramatic departure from the norms of recent decades. And at first glance, it felt as though President Trump was picking a trade fight not with a specific country, but with virtually the entire global economy.
However, President Trump soon clarified that the tariffs were intended less as permanent economic barriers and more as leverage in a broader negotiation strategy. By creating uncertainty and demonstrating a willingness to act aggressively, the administration sought to bring trading partners back to the table.
One thing is certain — these new trade policies have created a lot of confusion and anxiety for businesses, consumers and investors.
Confusion everywhere
Most people have heard of tariffs, but few really understand how they work in practice. To the average person, tariffs often sound abstract — a distant, government-to-government trade policy that doesn’t directly touch everyday life.
For years, tariffs were indeed a relatively quiet backdrop in economic policy, rarely at the center of public debate. But under Trump, tariffs have become a mainstream political and economic issue again.
So, who is eating these costs?
A tariff is essentially a tax on imported goods. When the U.S. government imposes a tariff, it adds a percentage cost to products brought into the U.S. from other countries.
For example, a 25% tariff on $100 shoes means an additional $25 tax is due when those shoes enter the U.S.
The U.S. importer is legally responsible to pay for the tariff costs. When a foreign company ships goods to the U.S., the U.S. importer (often a retailer or wholesaler) must pay the tariff to U.S. Customs.
The foreign exporter does not pay the tariff directly to the U.S. government. Most people think it is the other way around.
Even though the U.S. importer pays the tariff, the cost can be passed along in different ways:
• Importer absorbs the cost: They accept lower profits rather than raising prices.
• Importer passes it to consumers: Retailers increase prices to cover the tariff, which can raise consumer prices and contribute to inflation.
• Exporter absorbs some cost: Sometimes foreign companies lower their selling price to U.S. importers to keep demand stable, effectively sharing the tariff’s burden indirectly.
To get a measure for how these tariff costs are being passed, I would recommend monitoring the following statistics:
Import price index (IPI): Measures the prices U.S. importers pay for foreign goods. If tariffs are imposed, import prices usually rise immediately.
A rising IPI suggests importers are absorbing some of the tariff cost, or that foreign exporters are partially passing on the tariff. If the IPI stays flat, it may indicate foreign exporters are absorbing most of the tariff.
Producer price index (PPI): Measures prices U.S. producers charge for their goods.
If import costs rise due to tariffs, U.S. companies may pass costs on to downstream producers, or absorb it themselves. PPI increases after tariffs suggest costs are being passed along the supply chain.
Consumer price index (CPI): Measures prices consumers pay for goods and services.
If tariffs eventually lead to higher retail prices, CPI will rise. There is often a delay between tariffs hitting imports and CPI reflecting it, because companies may absorb costs initially.
U.S. corporate profit margins: Tracks how much profit companies are making relative to revenue.
If tariffs hit, but CPI and PPI don’t fully rise, shrinking profit margins indicate that U.S. companies are absorbing the tariff cost rather than passing it on.
In closing, I would caution against assuming that immediate inflation spikes are imminent. The actual impact of tariffs depends on corporate pricing strategies, competitive pressures and supply chain dynamics.
Monitoring import prices, producer prices and corporate profit margins over the coming months is the most reliable way to determine where the burden will ultimately fall.
E. Keith Wirtz, CFA, is the vice president and chief investment officer of The Wealth Group at Union Savings Bank.
