Since the start of the Trump administration’s trade war last year, economists and executives have repeatedly warned that consumers will ultimately end up footing the bill for tariffs through higher prices.
That’s true. It just might not feel like it.
A recent economic study estimated that the 10 percent tariffs imposed last year on $200 billion in Chinese products cost the average American household about $414 — money out of your pocket that helped cover the rising cost of importing those goods. But the trade war hasn’t occurred in a vacuum. The financial markets have twitched with almost every tweet, threat, hint and official imposition of taxes made by President Trump, including by depressing the price of crude oil. The result: Fear of the effects of the trade war has helped offset the effects of the trade war.
“The things that are being hit by the tariffs are going to be more expensive,” said Matthew Luzzetti, chief United States economist at Deutsche Bank in New York. “But on the other hand, if oil continues to decline, a big portion of the basket of goods that people consume will become cheaper.”
That’s not necessarily reason to cheer. The markets are reflecting concerns that an escalating trade war — the United States last month raised the tariff rate to 25 percent and has threatened to expand tariffs to an additional $300 million in Chinese goods — could tip the economy into a recession. The effects of that would be more serious than higher consumer prices.
But for now, at least, the markets’ response to the trade war is offsetting some of its costs to consumers.
A slowing economy consumes less oil.
Crude oil prices have tumbled 20 percent since their peak in late April, as the concerns about the trade war reignited and investors bet on a global slowdown. The International Energy Agency on Friday cut its estimate for oil demand growth in 2019, citing the drag of the trade war on the global economy.
Oil influences the price of virtually every product to some extent, whether in the cost of producing food on a farm or transporting a truckload of goods from warehouse to store. For consumers, it’s one of the clearest examples of how fluctuating financial markets can affect out-of-pocket expenses.
At an average of about $2.70 a gallon, gasoline prices are down more than 6 percent from last year, according to the automotive group AAA. And if history is any guide, gas prices will follow the price of crude oil lower (with a bit of a lag, of course). Airline fares, which are also heavily influenced by prices for crude oil and jet fuel, are continuing their recent decline.
Those lower transportation costs can help companies maintain their profit margins without passing on the full cost of tariffs to their customers, meaning prices don’t go up quite as much as they might have.
A strong dollar buys more elsewhere.
The American dollar, a global safe haven during times of economic weakness, has benefited from the trade fight over the past year. Investors have opted for the safety of the greenback over higher-returning investments.
The U.S. Dollar Index — a trade-weighted index of the strength of the dollar to currencies of important trading partners — is up roughly 3 percent over the last 12 months. That’s a significant move in the giant currency markets, which tend to be relatively stable, helping to keep the price of imports lower. Prices for imported consumer goods — excluding automobiles, big-ticket items that can skew the data — have declined sharply in recent months. In May, they were 0.7 percent lower than the same month last year.
The dollar’s gain has been even greater against the currencies of some key trading partners. For instance, the greenback over the last 12 months is up about 8 percent against the Chinese renminbi, helping to offset much of the 10 percent tariffs imposed last year.
And the strength of the dollar against the Brazilian real, for example, has prompted a surge of exports of cheap coffee from Brazil, the world’s largest producer. Global coffee prices are down about 14 percent from a year ago. That’s starting to filter through to supermarket shoppers: JPMorgan Chase analysts recently noted that prices for the Maxwell House and Folgers brands of coffee have declined in recent weeks.
Investor demands affect interest rates.
Just as investors who are worried about slowing global economic growth have sought the safety of the dollar, they’ve also moved their money out of riskier investments — like stocks and corporate debt — and into the sanctuary of government bonds.
This demand has pushed up the prices of government bonds, and yields, which move in the opposite direction, sharply lower. The yield on the 10-year Treasury note has dropped more than 1 percentage point from its recent peak above 3.2 percent last fall.
This might sound like an obscure financial market measure. But the yield on the Treasury note helps influence a range of other consumer borrowing rates, such as those for mortgages. Rates for conventional 30-year mortgages have tumbled below 4 percent from roughly 5 percent late last year.
It takes some time for lower mortgage rates, if they last, to filter through to consumers’ wallets. But for those looking to buy a home, it’s a welcome change. And recent economic reports have shown a burst of refinancing activity as borrowers rush to take advantage.
What’s the balance?
It’s impossible to say exactly how the tariffs affect the overall spending patterns of any given family, but for many the lower costs of other goods could mean that — so far — they have been a wash.
For instance, Goldman Sachs analysts recently looked at price data for nine categories of products affected by tariffs starting last year, including things like furniture, bedding, washing machines, auto parts, motorcycles and sewing machines. The bank found that prices for those goods rose roughly 3 percent between February 2018, when the tariff fight got underway, and this April.
On the other hand, the price of all other goods — excluding food and energy prices — declined by about 2.3 percent over the same period.
Families who bought a new living room set, a motorcycle or a washing machine were hurt by the global trade war. Others, less so.
But that, of course, was before the higher tariffs went into effect last month.
What happens next?
The forces that have softened the blow so far won’t necessarily be enough to offset those higher levies. And the proposed tariffs on additional goods — should they materialize — would most likely have a bigger impact on consumers.
Economists say tariffs on a further $300 billion of Chinese imports would hit American shoppers harder because they would cover more of the kinds of products people buy themselves, like shoes, clothing, cellphones and toys.
If broader tariffs were in place, shoppers might be tempted take some solace in the lower prices elsewhere offsetting the higher costs of a new iPhone or a pair of sneakers. But before they breathe a sigh of relief, they should remember the reasons those other goods are cheaper.
Investors around the world worry that the trade fight will do real damage to the global economy. If that happens, the cost for Americans could come in the form of rising unemployment.