US consumers will not pay Trump’s tariffs

It is with a certain glee that financial commentators point out that it is Americans who will pay for Trump’s ever higher tariffs. This is certainly true in a purely technical sense. When goods arrive at customs, the importer – be it a consumer or a company – will be notified about the duties that have to be paid for the imported items to be released and delivered. But this does not mean it is necessarily and always the end consumer who will bear the extra cost.

Importing companies or the exporter too may decide to swallow part or all of the new duty in order not to lose market share, or turnover, or both. For each item the burden-sharing will be different. Domestic competition may persuade the importer even to accept losses for a while. Lack of alternative markets may persuade the exporter to do the same.

With some goods the tax hikes on imports will indeed hit only the consumer, who has to accept it or abstain from the purchase. Consumer spending will shrink to fit affordability.

It is hard to discern the end game of Trump’s haphazard yet relentlessly rising tariffs. They are used as a weapon to pry countries away from China, to punish Canada for non-existent fentanyl shipments, or to force Brazil to stop prosecuting ex-president Bolsonaro, a Trump supporter, for violently refusing to accept fair election results. One of the stated aims is the reindustrialisation of America. The administration hopes that painful uncertainty will nudge corporations to move production onshore.

While uncertainty is hardly a convincing stimulant, intricate supply chains will create much headache. Raw materials and parts cross multiple borders backwards and forwards, and custom rules will have to decide where a final product legally originates from. Has the item in question been “substantially transformed” (as opposed to relabelled) to be counted towards the declared export country? Does it have enough parts sourced in the country to avoid being seen as transshipment?

Meanwhile, tariffs are a sizable and growing source of tax revenue. Moody’s Analytics estimate that by the end of the year the additional US customs revenue raised by the higher tariffs could exceed $300bn. This is, of course, guesswork. Nobody knows the final size of the duty burden. From August 1, the average duty rate will be 20.6% according to Yale Budget Lab. Toys, clothes and shoes will be up to 40% dearer from then on, burdening US households with $2,400 a year.

As trade “deals” have been slow in materialising (the EU, the UK, Vietnam, Indonesia and the Philippines have accepted steep, unilateral tariffs in fear of even harsher mistreatment), Trump has sent out letters to 25 governments imposing unilateral “deals”; for example to South Korea (25%), Bangla­desh (35%) and Canada (35%).

The exorbitant-sounding 200% tariffs on pharma­ceuticals are probably the least painful, as many US pharma firms have artificially created “imports” for tax avoidance purposes. For them it is a mere change in accounting. Meanwhile, it became more costly to import steel (50% tariff), aluminium (50%) and copper (50%). Eventually this has to hit manufacturers dependent on these metals.

The to and fro of tariff impositions since the announcement of the falsely labelled “reciprocal tariffs” on April 2 has created much churn in the markets. Stocks, bonds and the dollar have all dived (gold and metals rose), only to then rise again when the Trump administration, worried by the blowback, chang­ed tack and suspended or lowered the tariff threats. Financial Times commentator Robert Armstrong mint­ed the acronym “TACO”, which went viral. It stands for “Trump Always Chickens Out”, and inspired investors to buy every time the markets were shellshocked by the latest tariff announcements.

Until the markets stopped to care. The S&P500 stock index is at an all-time high, bond prices have stabilised, the dollar firmed, and company earnings reports are cheerful. After half a year of ever higher tariffs, inflation has hardly accelerated and unemployment is low (4.1%).

Bessent has put a wager on forcing the Fed to his will- Andreas Weitzer

The Trump administration and most market observers seem to believe that the mistreatment of trading partners is cost-free, as is the approval of Trump’s Big Beautiful Bill by both chambers of the US Congress. It entails cuts to healthcare entitlements for the poor, tax cuts for the wealthy, and raised the federal debt ceiling by $5 trillion. As a consequence, the US budget deficit – at the core of the lamented current account deficit – will grow over time, as will interest payments to US creditors.

To cut the interest bill, Trump and Treasury Secretary Scott Bessent are trying to turn the inflation-fighting Fed into an obedient Treasury handmaiden. They want the US central bank to lower short-term interest rates, whatever the cost. It would certainly and instantly lower the Treasury’s interest bill: short-term paper comprises two-thirds of all debt issuance, as Bessent has put a wager on forcing the Fed to his will.

Alas, this will come at the cost of higher inflation. It will be borne by US consumers and holders of US treasuries. The consequence will be higher long-term interest rates, as creditors will demand compensation for higher inflation. Conveniently for the current administration, existing debt will be devalued. Yet mortgage costs will go up and construction activity will sag.

Some analysts have started to doubt the rosy picture of US economic data lately. Immigrants arrested by the masked brutes of ICE everywhere, including at court hearings, are certainly loath to apply for unemployment benefits. Positive employment data, cheered by stock investors, are recording job gains mainly in healthcare, government and education, not in the broader economy.

Companies, not knowing how to assess the situation, still hold on to their employees. But they have stopped hiring, cut bonuses and hope the nightmare will go away. Between tariff hikes they have tried to buy time by filling up warehouses with products, spares and materials. It has bought them breathing space until their larders will run dry.

Those dependent on cheap immigrant labour, like builders, restaurateurs and farmers, wait with trepidation for many of their loyal workers to soon be carried off in handcuffs. Once they are gone their employers will lose capacity, or face higher labour costs.

Many small businesses will falter. Increasingly, tariffs are mentioned in bankruptcy procedures which are slowly starting to accelerate. The reckoning is merely postponed. Eventually, inflation, unemployment and profit warnings will measure the toll.

This dire picture will be replicated in countries dependent on trade with the US. As America’s consumers start to refuse to pay for tariffs because they cannot afford them, imports will dry up, and manufacturing and trade will wither. Instead of focusing on improving productivity, enterprises will put all their effort into lobbying for exemptions, or figuring out how to bypass custom controls, or finding windows of lower tariffs.

David Ricardo, the 19th-century British economist, formulated the idea of “comparative advantage”. It postulates that if countries focus on what they do best, and trade with each other, the world will be better off. In Trump’s world, only low tariffs will grant a comparative advantage. Yet nobody can say for how long. As the TACO trade has given way to market indifference, Trump will only harden his resolve.

Malta, with its insular economy based on service exports, budget tourists, leveraged construction and cheap imported labour, will look like an island of the blessed. At least for a while.