Americans are not likely to be hit hard even if the tariffs on Mexico, Canada, and China rise significantly this week.
A new analysis from the Federal Reserve Bank of Atlanta suggests that the consumer price impact of proposed import tariffs may be smaller than commonly assumed, with much of the cost increase tied to North American trade partners rather than China. While tariffs would lead to one-time price increases on certain goods, the study finds that these effects are not the same as sustained inflation.
President Trump and administration officials have said they plan to put in place sweeping new tariffs on Tuesday. The new import duties would apply to around $1.5 trillion of goods. Goods from Mexico would get a 25 tariff trate, as would imports from Canada, except Canadian energy, which would face a 10 percent rate. Tariffs on China are set to rise by an additional 10 percent.
Modest Price Increases, Not Runaway Inflation
The study estimates that new tariffs—10 percent on imports from China, 25 percent on imports from Canada and Mexico, and 10 percent on imports from other nations—could increase consumer prices between 0.81 percent and 1.63 percent. These estimates depend on how much of the tariff costs businesses pass through to consumers.
President Trump has said he no longer plans to impose an across-the-board 10 percent tariff on imports from other nations. Instead, he now envisions “reciprocal” tariffs that would match tariffs imposed by countries exporting goods to the U.S.
The research by four economists at the Federal Reserve Bank of Atlanta—Salomé Baslandze, Simon Fuchs, KC Pringle, and Michael Dwight Sparks—highlights an important distinction: tariffs create a one-time, persistent rise in the price level rather than an ongoing inflationary spiral. Unlike other inflationary pressures that require sustained price hikes, tariffs function more like a tax increase on select imported goods, which businesses may absorb or gradually pass on to consumers.
The report also examines how different sectors of the economy would be affected by the tariffs. The largest price increases are expected in industries that are heavily dependent on imports from Canada and Mexico, including automobile manufacturing, consumer electronics, and food products. By contrast, industries that source more goods domestically or rely on diversified global supply chains may experience more limited effects. The study acknowledges that while some companies will attempt to pass along the cost of tariffs to consumers, others will adjust their sourcing strategies or accept lower profit margins to remain competitive.
North American Trade Partners Drive Price Effects
Despite political rhetoric often focusing on China, the study finds that 80 percent of the estimated price impact comes from tariffs on Mexico and Canada. The reason is tied to the deeply integrated nature of North American supply chains. Goods manufactured in Canada and Mexico often contain substantial U.S. content, meaning tariffs on imports from these countries are effectively taxes on products with strong U.S. industry ties. The effect of these tariffs is expected to be felt most acutely in industries like automotive and machinery manufacturing, where cross-border supply chains are critical to production.
This finding also reflects a shift since the last major round of U.S. tariffs in 2018-2019, when China was the primary focus of trade restrictions. Since then, U.S. businesses have reduced reliance on Chinese imports, softening the potential consumer impact of new tariffs on China. However, with Mexico now the United States’ largest trading partner, tariffs on North American goods could have a more immediate effect on prices.
Tariff Pass-Through: Assumptions vs. Reality
The study’s price estimates rely on assumed pass-through rates, where either 50 percent or 100 percent of tariff costs are passed to consumers. However, historical evidence suggests that pass-through rates vary widely, meaning the actual effect could be smaller. Some businesses are likely to absorb a portion of the tariff costs rather than raise prices immediately. Competitive pressure among retailers, particularly in industries with slim margins, could limit price hikes, as companies attempt to keep their products affordable for consumers. In some cases, businesses may shift their supply chains, sourcing goods from countries not subject to tariffs, or substituting materials and components to lower costs.
The study also considers how consumers react to price increases, noting that demand elasticity plays a key role in determining how much of the tariff burden is ultimately passed through. If consumers respond to higher prices by delaying purchases or switching to domestic alternatives, businesses may have no choice but to absorb a larger share of the cost increases. This dynamic has been observed in past tariff episodes, where initial price spikes were often moderated over time as supply chains adjusted.
A 2019 study of the Trump administration’s tariffs found that pass-through rates varied significantly across sectors, with some industries absorbing a large share of costs. While tariffs do introduce upward pricing pressure, businesses may not always raise prices in full. The degree of pass-through will likely depend on industry competition, supply chain flexibility, and the overall economic environment.
The Fed’s Response Is Unclear
The Federal Reserve will likely monitor these developments closely, as policymakers weigh the risk of price increases against broader economic conditions. The impact of tariffs on monetary policy remains uncertain, particularly if price increases remain contained within a few sectors rather than triggering widespread inflationary effects. While the study acknowledges that tariffs can create price pressures, it does not indicate that they would push inflation beyond manageable levels or require aggressive action from the Fed.
The research suggests that tariff-driven price hikes will be meaningful but not necessarily painful for U.S. households. While some consumer goods may see higher prices, the study does not indicate a return to inflationary pressures seen in 2021-2022. With much of the tariff impact centered on North American trade partners, the study raises important questions about how policymakers balance trade policy objectives with consumer price stability. The broader economic effects will depend not only on the direct impact of tariffs but also on how businesses, consumers, and policymakers respond to the changing trade landscape.
Read the full article here
