Back to school: Tariffs hit the shopping list

Back-to-school shopping has given American families a practical lesson in trade economics. The China trade truce was extended on 11 August, but that did nothing to undo the double-digit tariffs that have worked their way into the price of clothing, shoes and consumer electronics.

The extension, signed a day before the truce was due to lapse, keeps higher reciprocal rates on China suspended for another 90 days. It leaves in place the 30 per cent levy on Chinese goods agreed in Geneva in May, made up of a 10 per cent baseline and 20 per cent tied to fentanyl, on top of duties dating from the first Trump administration. Meanwhile the new reciprocal rates on dozens of other trading partners took effect on 7 August, including 20 per cent on Vietnam, a leading supplier of footwear and apparel. There is no longer a cheap country to switch to.

Parents cannot wait

School shopping is spending that households cannot put off. A new television or a holiday can wait; children's clothes, backpacks and the computers schools require cannot. Retailers have run down the stock they bought before the tariffs and absorbed thinner margins through the spring. Now they have passed the accumulated duties onto the price tags, lifting the cost of the average school basket by eight to twelve per cent.

The delay had a simple cause. Importers rushed goods into American warehouses early in the year to beat the duties, a surge big enough to push first-quarter GDP growth below zero. The tariff is paid at the border by the importer of record, so stock landed before the increases carried the old cost. As that inventory sells through, each replacement shipment arrives with the full duty attached, and the autumn selling season is when the new cost base meets the shelf.

No carve-out this time

The first Trump administration took care over timing. In August 2019 it delayed tariffs on laptops, mobile phones, toys and some clothing until mid-December, precisely to spare the holiday shopping season. This year laptops and smartphones were again exempted from the reciprocal tariffs in April, although Chinese-made devices still carry the fentanyl-related levy. Clothing, shoes and backpacks received no such relief, and they are the items that fill most school lists.

Online bargains close too

Families who traded down to cheap online platforms are losing that escape as well. The exemption that let parcels worth less than $800 enter duty-free ended for Chinese goods in May, and an executive order ends it for shipments from every country on 29 August. Low-cost clothing sold direct from overseas warehouses now faces the same tariffs as a department store's imports, which narrows the price gap that kept budget shoppers loyal.

The arithmetic of pass-through can make the increase at the till larger than the duty itself. A tariff is levied on the import value of a garment, which is usually a fraction of its retail price. If retailers simply added the duty, the shelf price would rise by less than the tariff rate. Many retailers price by applying a percentage mark-up to landed cost, however, so a higher cost at the border is multiplied on its way to the shelf. That is how a double-digit tariff on import values can become a high single-digit rise in the price of a basket.

Retailers borrow to stock up

Mid-tier specialty clothing chains and department stores are having a hard season. Holding inventory that carries high tariffs takes a lot of working capital, and borrowing it costs close to the highest benchmark rates in several years. The Federal Reserve has kept its policy rate at 4.25 to 4.5 per cent since December, so revolving credit lines priced off short-term rates offer no relief. The largest chains can press suppliers to share the duty and spread the rest across huge product ranges; Walmart warned in May that it would have to raise some prices, but it has the scale to choose which ones.

Off-price chains are better placed, since they buy other retailers' excess orders late in the season, when suppliers are keen to clear them. Weaker chains with heavy debts and thin margins are squeezed from both sides, paying more for goods and more for the money to hold them. Their customers face a squeeze of their own: collections on defaulted federal student loans resumed in May, drawing on the same budgets that pay for school shopping.

Suppliers are not standing still. Clothing and footwear production has been moving from China to Vietnam, Bangladesh, Cambodia and India for more than a decade, and the tariffs give that shift another push. But each of those countries now faces a reciprocal rate of its own, and new factories need time to reach the quality and volume that big American buyers demand. The relief that sourcing changes can offer this season is small.

The case for patience

The counterargument is that the damage so far looks modest in the aggregate numbers. Consumer spending has held up, headline inflation has not surged, and some retailers are still absorbing part of the cost to protect market share. The pattern of pass-through matters more than the level, however. Back-to-school goods are among the first categories where the pre-tariff stockpile runs out, which makes them an early reading of what the holiday season will bring for a wider range of imports.

The July consumer price index, due this week, and quarterly results from the big retailers later this month will show how much of the duty is reaching shoppers and how much margins are still absorbing. The Court of International Trade ruled in May that the emergency law used to impose the reciprocal tariffs does not authorise them, and if the appeals court agrees it would change the arithmetic, although refunds would reach importers long before they reached parents. School shopping this summer shows tariffs working as a tax on households, and it lands just as student loan repayments and other debts take a bigger share of family budgets.