Eat the Tariff? The Real Economics Behind Who Pays
Walmart vs Home Depot
Recently, Walmart announced that it will have to increase its prices due to the tariff wars. This announcement received a harsh response from President Trump, who demanded that Walmart "Eat the Tariff." At the same time, Home Depot has announced that it will not change its prices.
Today, I would like to talk about which companies will be able to “eat the tariffs” and which will pass them on as price hikes. Whatever companies decide, it will hurt consumers. I will cover that at the end.
Who Will Eat and Who Will Pass?
First, I will recommend that you listen to Marketplace Radio's coverage of this topic on May 20th. Click here for the story
Second, the economics of this is simple. The cost of the product has increased, and firms have two options: to increase the price or keep it unchanged. What they decide will depend on the market structure of the industry. So not all firms will increase their prices.
Firms that do not change their prices are those that face elastic demand, meaning consumers are sensitive to price changes and can adjust their behavior accordingly. What determines whether demand is elastic? Here are the determinants of elasticity:
Availability of substitutes: The greater the number of substitutes available for a product, the more elastic the demand. When consumers can easily switch to alternatives, they're more sensitive to price changes.
Proportion of income: Products that consume a larger percentage of consumers' income tend to have more elastic demand, as price changes are more noticeable.
Time period: Demand tends to be more elastic in the long run than in the short run, as consumers have more time to find substitutes or adjust their consumption patterns.
Necessity vs. luxury: Luxury items generally have more elastic demand than necessities. People can more easily forgo luxuries when prices rise.
Product definition: Narrowly defined products (e.g., "Coca-Cola") have more elastic demand than broadly defined categories (e.g., "beverages") because substitutes are more readily available.
Consumer habits and brand loyalty: Weaker brand loyalty leads to more elastic demand as consumers are willing to switch between products.
Durability: Durable goods often have more elastic demand because consumers can postpone purchases when prices are high.
Whether firms pass on the tariffs as higher prices has more to do with the demand for their product than their political stance. Or at least that should be the case.
Regardless of the Decision, Consumers Will Pay
Regardless of whether the firm can pass on the cost of tariffs, it will eventually hurt consumers. Here is why.
In the case of higher prices, it is clear that the consumer will directly experience the impact of the tariff.
If the firm does not increase prices and "eats the tariff,” it will experience lower profits. This will ultimately lead to lower investment in the firm, fewer employees, lower salaries, or a combination of these outcomes. The employees working at those firms will be negatively impacted. They, too, are consumers!
The Takeaway
The political drama surrounding which companies "eat" tariffs versus which ones pass them on misses the fundamental economic reality: tariffs are ultimately paid by consumers one way or another. They represent a tax on consumption, whether it is immediate through higher prices or eventual through reduced economic activity.
When companies absorb tariff costs, they must compensate elsewhere. This might mean slower expansion, reduced hiring, postponed raises, or scaled-back product development. These adjustments ripple through the economy and eventually touch all of us.
The positioning of some firms as "patriotic" for absorbing tariffs while others are vilified for passing them on reflects political theater rather than economic reality. Companies make these decisions based on market conditions, competitive positioning, and profit requirements, not ideology.
Understanding the elastic and inelastic dynamics of different product categories helps explain why we see varied responses across the retail landscape. Home improvement stores like Home Depot compete in different market conditions than general retailers like Walmart, leading to different strategic responses to the same tariff policies.
As consumers navigate this environment, it's important to recognize that the economic burden of tariffs doesn't disappear through executive demands or corporate posturing—it simply shifts forms. The only question is how and when we'll pay.
Good luck,
Dr. A
Share the Knowledge: If you found this explanation of tariff economics valuable, please forward it to friends and colleagues who might be confused by the political messaging around who pays for trade policies. Clear economic understanding is more important than ever in today's policy environment.
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This is one of the most common talking points right now in my space. The political & fully legal gymnastics that the Importer of Record does to pass on the tariff cost is dumbfounding. Leads me to an additional question.
As an economist was are your views on a consumption tax?
It is interesting to see someone that has been a antin interventionist now doing the opposite