If it sticks, tariff strike-down could transfer $20 billion from consumers to firms
Asymmetric pass-through of tariff payments vs rebates could result in households paying $110 more in windfall profits to firms
If it sticks, the US Court of International Trade’s unanimous decision to strike down some of Trump’s tariffs could result in a $20 billion transfer from consumers to firms. As reported in Politico, under the ruling the government would have to repay firms for duties it has already collected:
The court’s ruling also means that the government may have to pay back duties it has already collected. “Anybody that has had to pay tariffs so far will be able to get them refunded,” said Ilya Somin, a professor of law at George Mason University, who helped argue a case against the tariffs brought by several small businesses.
Basic economic logic suggests that firms have been passing through most of the tariffs to consumers since they increased marginal costs. However, there is no symmetric economic incentive for firms to retroactively issue rebates to consumers for any tariff rebates they receive. As such, the rebates are a textbook example of what economists call “windfall profits,” or additional profits earned by firms through no particular actions of their own.
According to Treasury data analyzed by Politico, the government has collected roughly $40 billion in tariff revenue to date, with roughly $20 billion due to tariffs covered by the court ruling.1
If the court ruling sticks and rebates are provided — and that’s a big “if” — the end result may be consumers paying $20 billion in costs, firms earning $20 billion more in profits, and no net effect on government revenue. Or more simply, $20 billion may have gone from the pockets of consumers to the government, only for the government to ultimately put that $20 billion back into the pockets of firms.
To give a sense of the scale of the costs, this works out to be $110 per household or equivalently:
More than 2.5 tanks of gasoline in a typical car.2
Nearly a week’s worth of groceries for a household of two.3
Roughly 10 hours of work at the (effective) federal minimum wage.4
Not a great outcome for a President who ran on lowering costs for everyday families.
To be clear, pass-through of tariffs may not have been instantaneous. Using data from a group of economists researching the impact of the tariffs, our friend Ernie Tedeschi has (roughly) estimated that about 2/3rds of the tariff price impact has been felt to date. If this were the case, our estimates above would decrease by roughly 1/3rd, to around $70/household — still a meaningful amount for many Americans.
That is, the 10% baseline tariff, the 20 percentage point additional tariff on imports from China, and the 25% tariff on non-USMCA compliant imports from Canada and Mexico.
According to AAA, the national average gasoline price is 3.166. The typical car has around a 14-gallon tank, which makes for roughly 2.5 tanks at the current national average price.
Grocery expenditures differ widely by income of household. For example, Census data implies that more than a quarter of households spend less than $100/week on groceries, while another quarter spend between $100-200. The rest spend over $200.
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