CICC: How much tariff cost do American companies bear?

According to the Zhitong Finance APP, CICC released a research report stating that who bears the tariffs will directly determine the pressure on the United States. From a price perspective, the cost of tariffs averages a 1.2% drag on sample profit margins, with greater pressure on manufacturers. From a volume perspective, there is downward pressure on U.S. demand, with durable goods demand being front-loaded, and the demand for certain products (especially high-value products) experiencing a temporary increase before the tariff impacts prices. The rise of cost-effective consumption means that under tariff pressure, American consumers are becoming "thrifty," with low-priced or cost-effective products having an advantage. If the sharing ratio and tariff rates do not change significantly in the future, inflation pressure may continue to manifest in a mild manner, potentially being pushed back to the fourth quarter and peaking by the end of the year. CICC's main viewpoints are as follows: Since Trump took office at the beginning of this year, various tariff policies targeting countries (regions) and industries have emerged one after another. Currently, the actual effective tax rate calculated based on monthly tariff revenue has risen to 10.6%, while the theoretical effective tax rate for this round, estimated based on the import amounts and tariffs of various trading partners, may rise to 16-17% (Chart 1). The continuously increasing tariffs have raised market concerns about U.S. inflation, but the rise in CPI (especially core goods) has not been as severe as investors expected (Chart 2), remaining below expectations for the past four months. This may be due to various reasons, including stockpiling imports, exemptions, a smaller taxable range, slowing service inflation, and seasonal adjustment distortions. Chart 1: The actual effective tax rate calculated based on monthly tariff revenue has risen to 10.6%, and the theoretical effective tax rate for this round is expected to rise to 16-17% Chart 2: The rise in U.S. CPI (especially core goods) is not as severe as investors expected However, another important issue that cannot be ignored is: Who exactly bears the tariffs will directly determine the pressure on the United States? If most of the burden falls on exporters, it would be most beneficial for the U.S.; if U.S. companies bear it, it would suppress profit margins; if passed on to consumers, inflation will inevitably rise, and demand will decline. Currently, most estimates of U.S. inflation assume a "sharing ratio," but this ratio is purely hypothetical. Ultimately, how a new equilibrium is reached depends on the final implementation of tariffs and requires repeated negotiations between businesses and consumers, exporters and importers. The firm takes a micro perspective, looking for clues about "U.S. corporate behavior under the tariff backdrop" in the second quarter earnings reports and earnings calls. The firm filters and observes companies from two dimensions. 1) Selecting industries with high overseas dependence, by observing the ratio of U.S. manufacturing shipments to imports in an industry, one can roughly judge the overseas dependence of that industry The proportion of electronic products, textiles and clothing, and industrial goods in the United States is relatively low, with a high degree of reliance on overseas sources, making it more relevant to tariff-related issues (Chart 3). 2) Select enterprises at different stages of the supply chain. Theoretically, the circulation process of a product involves three stages: overseas enterprise sectors, domestic enterprise sectors, and end consumers. The domestic enterprise sector in the United States, which this article focuses on, can be further divided into manufacturers, distributors, retailers, and other supporting departments. Any domestic enterprise may be directly impacted by tariffs from overseas suppliers and indirectly affected by tariff transmission from upstream domestic suppliers (Chart 4). Considering that tariffs have different impacts on enterprises at various stages of the supply chain, the bank has selected representative enterprises in each supply chain stage of every industry, and also screened leading comprehensive retailers to comprehensively examine the role of various enterprises in the transmission of tariff costs (Chart 5). Chart 3: The domestic manufacturing shipment value and import value ratio of electronic products, textiles and clothing, and industrial goods in the United States is low, with a high degree of reliance on overseas sources, which is the main industry examined by the bank. Chart 4: The circulation process of a product involves three stages: overseas enterprise sectors, domestic enterprise sectors, and end consumers, while the domestic enterprise sector can be divided into manufacturers, distributors, retailers, etc. Any domestic enterprise will be directly and indirectly affected by tariffs. Chart 5: The bank has selected representative enterprises in each supply chain stage of every industry and additionally included leading comprehensive retailers to comprehensively examine the role of various enterprises in the transmission of tariff costs. How do enterprises hedge against tariff pressure? They can either raise prices at the product end or make supply chain adjustments at the input end. In the face of tariff pressure, U.S. enterprises generally adopt two types of measures: first, directly adjusting prices at the product end to pass costs downstream; second, negotiating with suppliers or optimizing the supply chain at the input end. However, different business characteristics and competitive landscapes mean that the preferred measures of enterprises may vary. 1. Mitigating tariff pressure at the product end: price increases, mainly for optional and high-end products. The most direct way for enterprises to cope with tariff pressure is to pass costs to downstream customers through price increases, examining dimensions such as the magnitude and pace of price increases. Overall, most enterprises chose to wait and temporarily absorb the cost impact of tariffs in the first half of the year, being relatively conservative in passing prices to customers. The main reasons include that most tariff terms were still under negotiation in the second quarter and attempts to maintain market share, among others In the second half of the year, some companies have indicated that they will implement larger price increases, primarily focused on discretionary consumption and high-end products. From an industry perspective: price increases for necessities are relatively late and modest; discretionary consumer goods show more significant changes, with categories like clothing being seasonal. 1) The demand price elasticity for necessities is low, and price adjustments have a greater impact on consumers, leading companies to be more cautious about raising prices. For example, many leading comprehensive retailers view price increases as a last resort. Walmart stated that it "will not pass on the tariff cost pressure of certain daily necessities to food prices" and "will absorb costs within categories," while Kroger is "working to mitigate the impact of tariffs on fresh produce and flowers." 2) Price increases for discretionary consumer goods may be more aggressive. Automotive parts are a typical example, with O'Reilly Automotive mentioning that "price changes and cost changes in the industry are highly synchronized," and even in the second quarter, the timing of the company's product price increases was earlier than the cost rise. LKQ has also been "pushing for price increases" and "passing on all tariff costs through pricing." Additionally, the sales cycles in some industries lead to seasonal pricing rhythms, such as Nike and Ralph Lauren in the clothing industry considering tariff costs when pricing in the spring and autumn. From a market positioning perspective: compared to high-end products, value-for-money products tend to raise prices later and by smaller amounts. Taking the clothing industry as an example, Ralph Lauren, which focuses on mid-to-high-end clothing and accessories, believes that "its customer base is less sensitive to price" and had already considered tariff costs in the pricing of its autumn collection as early as the second quarter. In contrast, TJX and Ross Stores, which focus on discount clothing retail, are more cautious about adjusting prices. TJX "will follow when retail prices in the industry rise but will maintain a gap with the industry average," preferring to raise prices in the second half of the year when tariff uncertainties are largely resolved. Ross Stores is also "very careful about price increases" and, despite price pressures in the retail sector in June and July, still "does not want to be the first company to raise prices." II. Mitigating tariff pressure on the input side: adjusting the supply chain to reduce exposure to mainland China Supplier negotiations and supply chain adjustments are the main methods to alleviate pressure on the input side. 1) In the short term, almost all companies will engage in supplier negotiations. Although companies typically do not disclose negotiation details, it can be inferred that the outcome is likely to be a "compromise," with companies, domestic suppliers, and foreign suppliers all bearing part of the costs. 2) In the medium to long term, many companies are attempting to adjust their supply chains, as they realize that de-globalization and trade restrictions are likely to be persistent risk factors. Specifically: Most companies will consider relocating production or diversifying their supply chains, especially to reduce exposure to a single country, which is particularly common in the relatively flexible retail industry. Home Depot, a home retailer, expects that the proportion of purchases from any non-U.S. region will not exceed 10% in the next 12 months. Consumer electronics retailer Best Buy stated at the end of May that the proportion of purchases from China had decreased from 55% in March to 30-35% in May, while Vietnam, India, South Korea, and Taiwan accounted for a total of 40% of purchases due to the applicable tariff rate of 10% at that time The comprehensive retailer Target stated that the proportion of Chinese imports in costs has decreased from 60% in 2017 to the current 30%, with plans to drop below 25% by the end of the year. In contrast, some manufacturers face higher costs in adjusting their supply chains, so to mitigate long-term trade risks, they are gradually bringing production bases back to the United States or seeking "domestic alternatives." Both General Motors and Tesla claim they will increase investments in U.S. factories to address tariff risks. Mohawk Industries, a leader in the flooring industry, stated that as tariffs evolve, they are "actively promoting domestic tiles and wall tiles" and expanding quartz countertop production capacity in Tennessee. The micro-level adjustments in corporate supply chains are also reflected in the scale and structure of macro import data (Chart 6): 1) U.S. import value has shrunk, decreasing from $948.1 billion in the first quarter to $818.1 billion in the second quarter, influenced by both the rush to import in the first quarter and companies gradually turning to domestic suppliers. 2) The gap in import proportions among regions has narrowed, with the standard deviation of proportions dropping from 5.07% in 2024 to 4.71% in June 2025, corresponding to the diversification strategy of U.S. companies' supply chains. 3) The proportion of Chinese imports has rapidly declined, falling from 13.4% in 2024 to 7.1% in June 2025, the largest drop among all economies. Meanwhile, the importance of Taiwan and Vietnam in U.S. imports has increased, with proportion increases of 2.8% and 2.5% respectively from 2024 to June 2025. Chart 6: Micro-level corporate supply chain adjustments are reflected in macro import data, such as shrinking import value, narrowing gaps in regional import proportions, and accelerating decline in the proportion of imports from mainland China. How significant is the impact of tariffs on businesses? From a price perspective, manufacturers absorb a larger share of tariff costs; from a quantity perspective, there is a preemptive demand for durable goods and an increase in cost-effective consumption. 1. From a price perspective: Tariff costs average a 1.2% drag on sample profit margins, putting more pressure on manufacturers. In the sample analyzed, tariff costs led to an average decline of 1.2% in corporate profit margins. When companies cannot further mitigate tariffs on the output and input sides, this pressure directly reflects in the profit and loss statement, dragging down corporate profitability. There are two ways to observe the tariff costs absorbed by companies themselves: 1) The estimated tariff costs disclosed by companies provide the most direct data reference; by calculating the proportion of these costs to revenue, one can determine the extent to which profit margins are eroded and how much tariff pressure is shared within the supply chain. In the selected sample, the proportion of tariff costs to revenue ranges from 0.5% to over 2.3%, averaging around 1.2%. 2) If companies do not disclose tariff cost data, one can use changes in profit margins (especially gross profit margins) as a substitute. The negative impact on gross profit margins is more direct, as the price increases of inputs due to tariffs will raise inventory values, which in turn reflects in the cost of sales The net profit margin may be indirectly affected by additional factors, such as compliance costs arising from tariffs, costs associated with supply chain shifts, and widespread wage pressure. However, changes in profit margins are closely related to the company's own product structure, sales strategies, accounting practices, and other factors, so it is necessary to dialectically view these in conjunction with financial reports and qualitative descriptions in earnings calls. From the perspective of the supply chain, manufacturers generally bear a higher tariff pressure compared to retailers, possibly due to greater direct exposure to imported raw materials, longer replacement cycles for inputs (such as key components), and some industries facing intense price competition. However, the specific burden ratio at each stage varies by industry. Automotive: Although manufacturers have adjusted prices, they still absorb a considerable portion of tariff costs, while parts retailers have even expanded their profit margins due to prior price increases. For example, General Motors' tariff costs account for 2.3% of its revenue, and even Tesla's automotive business, which focuses on new technologies and has a customer base less sensitive to price, has a ratio of 1.2%. In contrast, companies like LKQ and Genuine Parts, which focus on the automotive aftermarket and parts, claim that the negative impact of tariffs on their financial data is minimal. O'Reilly Automotive even saw an improvement in gross margin due to proactive price increases before cost hikes. Industrial Products: Manufacturers absorb most of the costs. For instance, Caterpillar's tariff costs account for 2.2% of its revenue, with gross margins expected to decline by 2.2 percentage points compared to the previous year. The impact on gross margins for distributors (such as Fastenal and W.W. Grainger) is relatively small, with Fastenal mentioning that "the goal is to protect profit margins." Apparel and Home Goods: Both manufacturers and retail distributors absorb tariff costs, with companies focusing on cost-effectiveness being more pronounced. Among the companies disclosing tariff estimates, the proportion of tariff costs to revenue varies from 0.5% to 1.1%, showing a more balanced distribution. The overall tariff costs borne by retailers are relatively low, which can be summarized in three reasons: 1) Their own profit margins are not high, particularly for brick-and-mortar retailers. For example, Walmart has explicitly stated that the retail industry itself has low profit margins, making it difficult to absorb all tariff costs. 2) There is greater flexibility in adjusting product mixes, with stronger SKU elasticity. Target mentioned that one important reason it can hedge against tariff impacts is the "flexibility provided by its multi-category business." Walmart also chooses to reduce purchases of imported goods that are priced high and affected by tariffs. 3) E-commerce platforms that lean towards a marketplace model benefit from their business model, with eBay being a typical representative, as its primary revenue source from transaction commissions means it is less affected by tariffs. However, some, like Dollar Tree, choose to bear cost pressures themselves to ensure cost-effectiveness, despite having a high proportion of tariff costs. II. Quantity Dimension: Demand Faces Downward Pressure, Durable Goods Demand Brought Forward, Cost-Effective Consumption Rising When discussing downstream demand, the bank noted that some companies (mainly durable consumer goods companies) believe there is downward pressure in the second half of the year, adjusting structurally towards cost-effective consumption. The underlying reasons may include price increases due to tariffs and declining consumer confidence, which have also led to a preemption of future demand Durable Goods Demand Frontloading: The demand for certain products (especially high-value items) has seen a temporary increase before tariffs impacted prices. General Motors mentioned that the U.S. automotive industry experienced a surge in demand in April and May, primarily because consumers made early purchases to avoid tariffs; subsequently, in June and July, demand had returned to expected levels. Apple also observed a similar phenomenon, estimating that about 10% of the demand in April came from tariff-related early purchases. Macroeconomic GDP data also reflects this change; in the second quarter of this year, the annualized quarter-on-quarter growth rate of durable goods consumption rose from -0.28% to 0.27%, and the annualized quarter-on-quarter growth rate of motor vehicles and parts consumption rose from -0.30% to 0.38% (Chart 7). This indicates that some durable goods consumption has been pulled forward, and combined with the pressure from tariffs on the fundamentals, it may adversely affect subsequent data. Chart 7: In the second quarter of this year, the annualized quarter-on-quarter growth rate of durable goods consumption rose from -0.28% to 0.27%, and the annualized quarter-on-quarter growth rate of motor vehicles and parts consumption rose from -0.30% to 0.38% Cost-Effective Consumption Rising: Under tariff pressure, American consumers have become "thrifty," with low-priced or cost-effective products gaining an advantage. For example, in the consumer electronics industry, Best Buy has already found that consumer preferences are trending in this direction. In the automotive sector, there is a substitution effect where used cars or auto parts replace new cars; for instance, LKQ pointed out that rising prices for new cars are pushing consumers towards alternative parts, especially dismantled parts that are not affected by tariffs, which have a greater advantage. Policy Implications? Domestic and foreign companies share tariff pressure, and moderate inflation creates conditions for the Federal Reserve to begin cutting interest rates; however, attention should be paid to the risks in discretionary consumption categories. Domestic and foreign companies share tariff pressure, and inflation is rising moderately. Companies' price increase measures indicate that tariffs do indeed transmit to downstream consumption, but supply chain adjustments also mean that overseas importers have absorbed some of the pressure, which partly explains why inflation has risen moderately over the past four months. If the sharing ratio and tariff rates do not change significantly in the future, inflation pressure may continue to manifest in a moderate manner, potentially being delayed until the fourth quarter and peaking at the end of the year. The bank expects that the overall CPI and core CPI will not be pushed up by tariffs by more than 1.0 percentage points, with year-on-year rates of 3.2% and 3.4% respectively in December this year, and the same rates in March next year (Chart 8). Chart 8: If the speed of inflation increase does not change significantly in the future, it is expected that the overall CPI and core CPI will not be pushed up by tariffs by more than 1.0 percentage points, with year-on-year rates of 3.2% and 3.4% respectively in December this year and March next year. If the current trend continues, the Federal Reserve has the conditions to start cutting interest rates. One misconception in the market regarding monetary policy is that interest rates can only be lowered when inflation itself declines. In fact, the "avalanche" of non-farm payrolls in July indicates that underlying growth in the U.S. is slowing, and the front-loading of durable goods consumption may have already exhausted some future demand, so the U.S. economy inherently needs support from interest rate cuts and fiscal measures. The Federal Reserve was previously hindered by uncertainties regarding inflation, but now the tariff and inflation paths with major trading partners have been largely determined, and the CPI data over the past four months has only shown mild tariff transmission, so this barrier has also been removed, creating conditions for interest rate cuts. CME FedWatch data shows that the probability of a rate cut by the Federal Reserve in September has risen to 96.2%, with a potential cut of 75 basis points by the end of the year (Chart 9). Chart 9: The probability of a Federal Reserve rate cut in September has risen to 96.2%, with a potential cut of 75 basis points by the end of the year. Subsequently, attention should be paid to whether tariff sharing shows non-linear changes, especially in the category of discretionary consumer goods. As mentioned above, U.S. companies have a tendency to accelerate price increases in the second half of the year. Among them, the pricing strategy for discretionary consumption is relatively aggressive, and if this occurs, it may put greater pressure on inflation (especially for items like used cars, which have been severely affected by seasonal adjustment factors in recent months)