China Tariffs and Coronavirus a Double Hit to American Retailers

The double-whammy of increased tariffs imposed by the United States on China and fallout from the coronavirus could make it even more difficult for American retailers to weather the storm in the coming months—or increase pressure on them to pass prices on to consumers.

Recent research also shows that US companies have disproportionately borne the brunt of the increased tariffs on China, as the ongoing trade war nears the two-year mark.

“The situation may get more pressing for some of these companies that will be hit with a double-shock,” says Alberto F. Cavallo, Edgerley Family Associate Professor of Business Administration at Harvard Business School. “There is a demand shock from consumers buying less, and a supply chain disruption in addition to the tariffs, which only makes things worse.”

Cavallo presents the findings in a paper, Tariff Passthrough at the Border and at the Store: Evidence from U.S. Trade Policy, accepted for publication by American Economic Review: Insights. It was co-authored by Gita Gopinath of Harvard University and the International Monetary Fund; Brent Neiman of the University of Chicago; and Jenny Tang of the Federal Reserve Bank of Boston.

"Typically, most economists would tend to assume that these prices would be passed on relatively quickly at the consumer level. That didn’t happen.”

To gauge the effects of the tariffs since the Trump Administration first imposed them on China in July 2018, Cavallo and his colleagues used proprietary data from the Bureau of Labor Statistics that is more detailed than the US Census data economists typically examine.

In addition, they relied on a database called the Billion Prices Project, which Cavallo first developed as a Ph.D. student at Harvard several years ago. The tool scrapes prices from the websites of hundreds of online retailers to track how they change over time. “What is distinguishing about our paper is that we observe prices not only at the border, but we can also see the impact in retail prices,” Cavallo says.

Consumers sheltered from price increases

In a preliminary analysis of the data last year, the researchers were surprised to find that Chinese exporters were not dropping prices of goods they sold to US importers. Nor, however, were US retailers passing the prices on to consumers. “Typically, most economists would tend to assume that these prices would be passed on relatively quickly at the consumer level,” Cavallo says. “That didn’t happen.”

Instead, companies seemed to adopt a wait-and-see attitude with the trade war, frontloading some purchases before the tariffs took effect to minimize their effects, and shifting some purchases to other countries to cut costs.

However, Cavallo speculates a fear of customer backlash kept them from recouping costs by increasing their retail prices. “These companies were worried about antagonizing their customers if they quickly passed on the additional tariff costs,” Cavallo says.

What’s even more surprising is that even after a year and a half, companies have still only raised prices by around 2 percent, despite tariffs rising as high as 20 or 25 percent.

“There are some mechanisms that retailers seem to be using to avoid increasing prices,” Cavallo says. By comparing prices in the US and Canada, the researchers found some evidence that retailers are spreading price increases across a broader range of products—not just those directly affected by tariffs—to minimize their effects.

Also, importers have increasingly sought other suppliers overseas. “Before the tariffs, roughly 90 percent of imported goods were coming from China,” Cavallo says. “That share has dropped to 70 percent.” That means countries such as Malaysia and Vietnam may be the real winners of the US-China trade war, hurting China in decreased exports even while they’ve maintained their prices.

It’s US retailers, however, that mostly absorbed the higher prices caused by the ongoing trade war. While last year’s corporate tax cuts helped to soften the blow, those tariffs have continued to cut into their profit margins. The sunk costs of their supply chains have made it difficult to move the bulk of their operations from China, especially when the future of the trade war is uncertain.

“They’ve made easy shifts, but it’s much harder to relocate a factory from China to Vietnam,” Cavallo says. “They are unwilling to make those hard choices until the dust settles, and they know if this is a permanent shock.”

The COVID-19 squeeze

Now with the new shock from COVID-19, these retailers are put in even more of a squeeze.

“These companies suffered a major shock with the trade war and chose to absorb it,” he says. “Now it will be much harder for them to cope with the pandemic shocks.” One way to give relief to companies, of course, would be to come to an agreement with China and drop or reduce tariffs.

The fact that consumers have been insulated from the effects of those tariffs, however, makes that possibility less likely. “Since it didn’t affect the prices they face, they do not perceive the downsides of the trade war,” Cavallo says.

To the extent that tariffs exacerbate the cost of the pandemic, their continued application could further drag down the American economy, harming companies and consumers alike. In the end, companies may have no choice but to pass their costs along, increasing prices for their customers at a time when they are least able to afford it.

About the Author

Michael Blanding is a writer based in Boston

[Image: Art Wager ]