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How a temporary tariff can turn into a permanent price hike

Ethan Wolff-Mann
Senior Writer
FILE PHOTO: U.S. Commerce Secretary Wilbur Ross testifies before a Senate Finance hearing on “Current and Proposed Tariff Actions Administered by the Department of Commerce” on Capitol Hill in Washington, U.S., June 20, 2018. REUTERS/Kevin Lamarque/File Photo

As early as September, $200 billion worth of Chinese imports may be slapped with 10% tariffs.

In a shift, the Trump administration’s most recent 195-page list proposes taxes on thousands of consumer goods, not just industrial products as earlier tariffs covered.

This makes things interesting, given that the budgets of American consumers are now in play. While some companies may absorb costs for a time, tariffs will trickle down to consumers over the next year, according to Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.

My guess is that first of all, the coming prices will not reflect the full tariff Trump is imposing,” said Hufbauer. “At least not right away. But given we have a strong economy, I expect it to pass through to the prices in the period over a year.”

Unlike the 40% tariffs for washing machines that were approved in January, which pushed prices up 16.4% in just a few months, the 10% duty will have a slower effect on people’s wallets.

But what happens when tariffs expire or are canceled? In the past, when only a few products have been in the crosshairs of trade actions, prices often fell quickly after tariffs expired.

This time, however, with thousands of products in play, the likelihood of a perfect situation in which the cost savings of removed tariffs result in quickly lowered prices is unlikely.

Once firms have priced into the market whatever their costs are, the tendency will be — if the tariffs go down — is to keep the prices at about the same level,” said Hufbauer. “In other words, to pump up their margins.”

With consumers now used to higher prices, firms may be able to get away with not bringing them back down. In the case of the Obama tire tariffs of 2009, Hufbauer notes that prices did fall after the tariffs were canceled. This time, however, with so many products involved, there can’t be much media attention on them all, which means companies will face less public pressure to adjust prices back to their original levels. It is essentially a ratchet effect.

“There’s a lot of resistance to prices going up and going down,” said Hufbauer. “But once you make the decision to go up, you don’t go back very quickly.”

For certain products in crowded industries, competition could provide the gravitational force that brings prices down to their former equilibrium.

“I can see that some firms, to make good PR, might say ‘okay the tariffs have come off and we’re going to cut down,’” said Hufbauer. “For conspicuous, consumer type goods. There I can see the motivation of the firm to show that they’re good guys and will take off the tariff.”

The problem is, not every market has the kind of downward pressure necessary.

“This will contribute to inflation,” said Hufbauer.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, retail, and personal finance. Follow him on Twitter @ewolffmann.