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As President Trump imposes broad-based tariffs, U.S. companies that rely on imported products have three choices: a) take the hit to profits, b) stop buying imported goods, or c) raise prices to recoup their costs. The question is: Which option are they choosing? First, a basic example: A company sells $10 scarves from China for $20 in the U.S. A 30% tariff on Chinese imports means the scarf suddenly costs the company $13. The choices are: a) The company pays the $13 and continues charging $20, making $7 in profit instead of $10. b) To avoid tariffs, the company buys scarves from a U.S. manufacturer (perhaps at a higher price.) c) The company pays the $13, but passes the extra $3 on to customers, selling its scarves for $23 instead of $20. So what’s actually happening? Economists at the New York Federal Reserve surveyed businesses in the New York-Northern New Jersey area in May. About three-quarters of those facing tariff-related cost increases offloaded at least some to consumers. And nearly a third of manufacturers and 45% of companies in service sectors said they fully passed on all tariff-related cost increases by hiking prices. They didn’t dilly-dally, either: Over half of both manufacturers and service firms said they raised prices within a month of getting hit by tariff cost increases. Keep in mind that the survey was conducted before tariffs on China were slashed from 145% to 30% and before a trade court ruled that many of Trump’s tariffs were illegal. (Those are still in effect pending an appeal by the Trump administration.) That’s not to say businesses weren’t anticipating plenty of uncertainty about tariffs, and for good reason. The president has rolled back or temporarily suspended many of the tariffs pending negotiations with the countries in question (a July 9 deadline is looming). And the different types of tariffs — reciprocal, universal, country-specific, import-specific — can be difficult to make sense of. Case-in-point: Many companies surveyed by the Fed economists couldn’t tell which tariffs they were paying and admitted to not being sure what to do in response. Of course, some big companies are more easily able to absorb the extra cost of tariffs. And others have more leverage to raise prices based on demand for the thing they’re selling. In fact, the Atlanta Fed surveyed companies in the Southeast in April about a hypothetical cost increase of 10% or 25% and found that most didn’t think they would be able to pass on all of it to their customers without reducing demand. On average, they anticipated they’d realistically be able to pass on about half of those price increases. So what? Tariff-related price hikes haven’t really shown up in U.S. inflation data — at least not yet. But if tariffs continue and companies opt to pass them on, you don’t want to be unprepared. They may not be what inflation-weary Americans were hoping for next, but building up your emergency savings, scrutinizing non-essential spending, and creating a back-up financial plan can help you weather whatever comes next.Related Reading
The Trump Tariffs Aren't Causing U.S. Prices to Spike. Here's Why. (CBS News) Trump Tariff Tracker (Atlantic Council) Why Walmart Decided to Say It Would Raise Prices — and Risk Trump’s Fury (CNBC)Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
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