The Wall Street Journal has had some fantastic coverage of tariffs since the so-called “Liberation Day” tariffs were announced. One recent article (“Retail Giants Manage to Keep a Lid on Prices but Warn It Can’t Last,” 29 April 2025) demonstrates some important insights into tariffs. Sarah Nassauer, Shane Shifflett, and Sebastian Herrera write (emphasis added):
To keep prices low on phone chargers, towels and blenders in the face of rising tariffs, America’s largest retailers are trying everything.
They are pressuring their suppliers to absorb cost increases and dropping free perks from corporate offices. They have paused some shipments of goods from China and are leaning on inventory that has already been imported to the U.S.
…
They warned Trump that higher prices would be difficult to avoid and said certain products could become scarce if retailers decide not to sell them to avoid tariff costs.
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Some cost-cutting measures are in full effect. Last week, Walmart told staff of its Hoboken, N.J., office that free plates, bowls and cups would no longer be available in the office, according to people familiar with the situation. A memo sent to staff encouraged employees to bring their own.”
The whole article is full of insightful tidbits that all lead to one thing: there are many ways for firms to adjust to tariffs, not all of them are raising prices. Walmart is reducing employee benefits. Some firms are considering cutting product lines. Firms are overstocking now. In another WSJ article, other firms are cutting employee benefits like travel. All of these are real costs over and above the loss in consumer welfare and deadweight loss from the tariffs.
Economic models are extraordinarily useful; they explain a lot. The supply and demand model is exceptionally useful as it explains much human behavior outside of the market relationship. The model looks at the relationship between price and quantity. Those are the two variables—the margins people adjust along.
But, in reality, there are many margins beyond price and quantity. What’s more, what those margins are and their relative value will vary from decision-maker to decision-maker. This means that decision-makers will make different decisions, even when faced with the same constraints. With tariffs, some may raise prices. Some may cut benefits. Some may switch products. It’ll all depend on the opportunity cost: the realistic alternatives each individual faces.
The key takeaway from the supply and demand model is not the relationship between price and quantity per se, but the effects costs have on various margins. When costs rise, people will economize along many margins, not just price. Consequently, when looking at the costs of tariffs (or any other policy like minimum wage), we cannot look solely at changes in price. Looking at just one margin can cause one to miss all these hidden margins.
READER COMMENTS
David Henderson
May 9 2025 at 11:39am
Nice.
steve
May 9 2025 at 1:00pm
I think this is correct but the bad part is that a lot of this stuff will be unseen by most people. This will allow the tariff advocates to claim they have had minimal effect as they will look only at the actual prices of end goods which, TBH, is what most people will also concentrate upon.
Steve
Jon Murphy
May 9 2025 at 1:10pm
Very true. Although, I hope through my blogging, I can reveal these hidden stories. Perhaps someone like you, an intelligent reader, remembers this post and brings up the argument when someone tries to say tariffs have no effect.
You’re absolutely correct here. One of the sub-plots of the article is that these measures cannot continue forever; if tariffs stay in place, they have to raise prices. American firms can only eat the costs for so long.
Matthias
May 9 2025 at 10:56pm
Cutting employee benefits is essentially equivalent to a wage cut.
These benefits are likely not in any contract, so they are quicker and easier to cut than sticky nominal wages.
Assuming total compensation levels are basically set by market equilibrium, Walmart and co can get away with this without bleeding workers, likely only because real total compensation has dropped.
My prediction: in the longer run, most of these benefits will come back, even if the tariffs stay. That’s because Walmart is offering eg free plates only because workers value them more than they cost Walmart to provide (and plates specifically likely aren’t getting that much more expensive despite the tariffs).
But this shift back to benefits will only happen in the longer run, when real monetary wages have time to adjust. Most of that adjustment will likely come from inflation, but some will come from lower raises (than previously expected as workers gained seniority and experience) and from lower wages for new hires, almost none will come from outright nominal wage cuts. Companies only do those for the rank and file when the situation gets really dire.
Let’s see how that prediction fares.
Jon Murphy
May 10 2025 at 8:48am
Your prediction could be.
One point, however. You write:
This could be, but we don’t know. Employees are not paying Walmart for plates. Walmart was providing plates to employees. That means the value to Walmart (not the employees) exceeds the costs to Walmart.
Warren Platts
May 10 2025 at 4:57am
Interesting! So it really is the case that the full costs of tariffs are not passed on to the consumer. That in fact producers at every level, both foreign and domestic, will absorb some or even all of the cost of a tariff in order to preserve market share…
Jon Murphy
May 10 2025 at 1:49pm
Except, as I discuss here, the cost is passed along to the consumers. It’s spread over the importers, the wholesalers, the retailers, and the end-users; they are all consumers (at one stage or another) of the import.
This is a response to those who claim that because retail prices haven’t risen, that there are no costs to the tariffs (eg Steve Miran and the USTR). People who do not understand the model just draw it out, see the price didn’t rise by the full amount of the tariff, and conclude that the foreign producer therefore must have paid some. But it is the same mistake that people who claim the minimum wage helps just because employment numbers are not cut make.
This is why it is crucial to know the models, know economic theory, rather than just draw out models and jump to conclusions.
As an aside, it certainly does seem like the US is bearing the entire brunt of tariffs. China, for example, simply shifted their exports to other markets.
Felix
May 10 2025 at 9:24pm
That last line, about China shifting exports elsewhere, raises some questions.
How trustworthy are Chinese statistics? US statistics are notorious (at least to me) for always being corrected in the politically-wrong direction, making me suspect political interference, which I’d expect would be much worse in China. Or maybe these statistics comes from the new importers.
How long can China keep shifting exports elsewhere? They must be losing some money over it, otherwise they would have been doing this before the Litigation Day tariffs.
Jon Murphy
May 10 2025 at 9:35pm
In this case, I’d trust the Chinese stats: they’re supported by other sources.
Your second point isn’t necessarily true. They’re not necessarily losing money, especially if the market is competitive.