MORE PRICE HIKES AHEAD
There are already signs of prices increasing because of the tariffs. For instance, the US producer price index rose by 0.9 per cent in July 2025, the highest jump in more than three years. With the tariff pause ending in August 2025 (except for China) and inventories stockpiled prior to the tariffs running out, more price increases are likely. Other indirect effects will add to inflationary pressures over time, as prices of domestically produced substitutes rise in unison with the imports they compete with.
That said, these are the only first-round price effects of the tariffs. In the second round, rising imported input costs will feed through manufacturing supply chains, reinforcing the inflationary impact of tariffs and eroding the competitiveness of US exports that use them.
With inflation comes a rise in the cost of living, which will lead to demands for higher nominal wages to retain their real value. This will precipitate a wage-price spiral. If this leads to a rise in inflationary expectations at the macro level, it could fuel a vicious cycle that threatens runaway inflation. Monetary tightening that dampens economic growth may be required to contain inflation.
Over time, the likely response from trade partners is to reduce their reliance on the US market. There are signs that Southeast Asia is already diversifying. There will be adjustment costs given the importance of the US market to Southeast Asia, but these costs will diminish over time. As competition to supply the US market diminishes, the incentive to “eat” the tariff will also decrease. The eventual outcome will be higher prices and fewer choices for US consumers.
One reason why Trump loves tariffs is the belief that exporters will “eat” them by lowering prices to maintain competitiveness in the world’s largest consumer market.
Quite to the contrary, the international evidence suggests that tariffs are usually fully passed through in the long run. Evidence is emerging that this is starting to happen with the recent Trump tariffs. This trend is likely to continue, leaving the US with rising inflation, inequality, and slowing growth, raising the risk of stagflation.
It would appear that Southeast Asian exporters will not need to cut margins if most countries are passing through the tariffs. Southeast Asia’s manufacturing supply chains remain China-centred and are so complex that shifting production to the US because of these tariffs is unlikely to be easy or worthwhile. While they might retain their profitability, export volumes may fall if US growth slows. While there may be winners and losers in Southeast Asia, the US and the world will be worse off because of these tariffs.
Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute. This commentary first appeared on the Institute’s blog, Fulcrum.
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