Market Power Shifts Tariff Costs to Suppliers: A New Perspective
The conventional wisdom holds that U.S. tariff costs are passed onto consumers. However, a recent study by Vanessa Alviarez, Michele Fioretti, Ken Kikkawa, and Monica Morlacco challenges this notion. Their research reveals that dominant U.S. importers leverage their buyer-seller relationship dynamics to force higher costs onto exporters, rather than consumers.
In 2018, President Donald Trump's administration imposed tariffs on hundreds of billions of dollars of imports, particularly targeting steel and aluminum from China. The question of who bore the brunt of these tariffs sparked debate. While many assumed consumers would foot the bill, the authors' analysis uncovers a more intricate scenario.
By examining detailed U.S. customs data, the study finds that U.S. importers, especially dominant ones, possess significant bargaining power. This power allows them to mitigate tariff shocks by negotiating lower prices. Conversely, exporters absorb a substantial portion of the burden through reduced margins and lower costs.
The authors introduce a novel perspective by considering the bargaining dynamics within ongoing relationships between firms. Unlike anonymous markets, most trade flows involve long-standing connections, such as a U.S. carmaker sourcing transmissions from a Japanese supplier or Walmart relying on garment factories in Bangladesh. These relationships are characterized by relationship-specific investments, switching costs, and reputational ties.
In such settings, prices are determined through bargaining rather than marginal costs. Suppliers with limited competitors can extract higher prices, while large buyers representing a significant portion of a supplier's sales can exert downward pressure on prices. The outcome hinges on the relative strength of each party's outside options, i.e., the ease of finding alternative suppliers or replacing a buyer.
The study's key finding is that U.S. importers possess four times more bargaining power on average than their suppliers. This imbalance results in foreign exporters selling at very low markups or even close to marginal cost when negotiating with large buyers, as losing such clients would significantly impact their revenues and production costs.
The 2018 tariff war exemplifies this phenomenon. Prior studies using aggregate data concluded that tariffs nearly completely passed through to importers and their end consumers. However, when the authors focused on specific relationships between U.S. importers and foreign exporters, they discovered a 65-70% pass-through rate.
This discrepancy is significant. It indicates that a substantial portion of tariff costs was absorbed by foreign firms, rather than solely by U.S. consumers. However, it's important to note that not all U.S. firms experienced this equally. Large buyers with substantial bargaining power paid less, while smaller importers faced higher prices.
The study provides two theoretical examples to illustrate how buyers shift costs: Walmart's negotiation with Bangladeshi apparel suppliers and Apple's role in the electronics supply chain. These examples highlight the misleading nature of aggregate price analysis, as the impact of tariffs on import prices varies depending on the relationship between buyers and suppliers.
The research also challenges the prevailing narrative that suppliers cut their markups strategically. Instead, the adjustment primarily stems from suppliers scaling back production in response to weaker demand from large buyers and reducing production costs per unit. This muted price effect contrasts with the idea that suppliers simply cut final export prices.
The findings have broader implications. They suggest that the impact of tariffs on imported consumer goods is uneven, depending on the firms U.S. consumers purchase from. Dominant retailers may insulate their customers, while those relying on smaller importers may face higher prices. Moreover, the study underscores how market power influences global supply chains, leaving suppliers financially weaker and less resilient.
The study also reframes debates about protectionism, highlighting how policies that appear symmetric on paper can have asymmetric effects in practice, exacerbating inequalities between large and small firms. In terms of policy and governance, the research emphasizes the need to consider buyer power in competition policy and the role of bargaining power in shaping the incidence of tariffs.
In conclusion, the study underscores the complexity of tariff costs and the importance of understanding market power dynamics. By recognizing the distribution of tariff costs and the leverage held by buyers, policymakers, corporate boards, and the public can engage in more informed debates about the future of globalization and the implications of trade policies.
