New Tariffs Take Effect and Oil Retreats From $100 as Wall Street Steadies

Tariff Pass-Through

A tariff is a tax the U.S. government charges on goods imported from another country, collected from the U.S. company that brings the goods in, not from the foreign exporter. 'Pass-through' describes what that U.S. importer does next: does it eat the extra cost itself (squeezing its own profit margin), or does it raise the price it charges customers, passing the cost down the chain until it eventually shows up in what consumers pay? In practice it's usually some mix of both, and the split between them is what economists call the pass-through rate. The pass-through rate depends heavily on how much pricing power a company has. A retailer selling a commodity-like good in a competitive market may not be able to raise prices without losing customers to competitors, so it absorbs more of the tariff in its own margins. A company selling something with few substitutes has more room to pass the cost on. Studies of the 2018-19 U.S.-China tariffs found pass-through to U.S. import prices was close to complete — importers largely didn't get a discount from foreign exporters — but pass-through to retail consumer prices was slower and partial, because U.S. companies absorbed some of the hit in margins rather than immediately raising shelf prices. This matters for two separate things investors track: corporate earnings and inflation. If a company can't pass a tariff through, its margins compress and earnings estimates need to come down. If it can pass it through, consumer prices rise, which shows up in inflation data like CPI, and that in turn matters to the Federal Reserve, which sets interest-rate policy partly based on how much inflation tariffs are adding to the economy.