Tariffs Poised to Hit Food Prices
Tariffs and immigration crackdowns are pushing food prices higher, squeezing U.S. consumers and fueling fresh inflation risks.
Tariffs & Immigration Crackdown is a Recipe for Accelerated Food Inflation
It's official, the Trump administration's tariffs take effect on Tuesday, featuring a 10% tariff on Chinese goods and a 25% on all goods from Canada and Mexico. Wall Street analysts had largely dismissed the threat of sweeping tariffs as a negotiating tactic. However, the U.S. lacks significant leverage on numerous imported goods, particularly those for which domestic production is insufficient. The combination of higher costs for imported goods due to these tariffs and labor shortages prompted by tightened immigration regulations means that consumers will face rising prices in restaurants and grocery stores.
Tariffs and Food Import Costs
Tariffs on imports, particularly those targeting agricultural products from Canada and Mexico, are meant to protect domestic farmers. However, these tariffs often have the unintended consequence of driving up prices for consumers. When tariffs increase the costs of importing food items, grocery stores and restaurants are compelled to pass those costs on to customers.
For example, tariffs on Mexican avocados and Canadian beef disrupt established supply chains and lead to significant price hikes at grocery stores. Restaurants, too, will see their operating expenses rise as ingredient prices climb, ultimately translating into higher menu prices for consumers. Policies aimed at protecting specific sectors can inadvertently harm those they are intended to benefit, further restricting consumer purchasing power.
Immigration Policies and Labor Costs
Immigration policies that limit the availability of seasonal and immigrant labor amplify these challenges for consumers. The restaurant and grocery sectors rely heavily on a workforce that often includes substantial numbers of immigrant workers. When enforcement measures lead to labor shortages, these industries face increased operational costs.
Labor cost escalation and scarcity of workers have been the main culprits in restaurant prices outpacing grocery prices over the past five years. After an unsteady path back to low-single-digit restaurant inflation, pressure on labor supply and food costs makes it unlikely that restaurant prices will stabilize lower. Likewise, grocery stores may encounter challenges in restocking shelves and maintaining efficiency, which can contribute to higher food prices across the board. The combined effect of increased labor costs adds to the overall cost of food and contributes to inflation, further straining consumers’ budgets.
The Chain Reaction of Price Increases
The challenges posed by tariffs and immigration policies create a chain reaction that affects consumer prices. Tariffs restrict access to affordable imported food items, while immigration restrictions diminish the workforce required to ramp up food production and distribution. As a result, consumers bear the brunt through elevated grocery bills and increased dining expenses.
Moreover, rising food prices go beyond mere inconvenience. For many families, especially those on fixed incomes, the increasing cost of food can significantly erode their purchasing power, forcing them to make difficult trade-offs when it comes to essential items. This scenario sends ripples throughout the economy, leading consumers to decrease spending on other discretionary items, which can further inhibit economic growth.
Key Food Imports and Substitution Challenges
Without viable domestic production capacity to replace the imports, the ‘protectionist’ objective of the tariffs is not achievable. The U.S. relies on food imports from Canada, Mexico, and China, not out of altruism, but because for many of these goods we don’t have the domestic ability to produce enough to satisfy consumer needs all year round. Many of the key food imports below cannot be replaced by domestic producers sufficiently to satisfy consumer demand.
Top Food Imports
From Canada (29.4 billion)
Bread, Pastry, Cakes, and Biscuits: US$5.03 billion
Canola Oil: US$3.9 billion
Fresh or Chilled Beef: US$2.66 billion
Canola Meal: US$1.6 billion
Potatoes: US$1.5 billion
From Mexico (47.5 billion)
Beverages, Spirits, and Vinegar: $11.75 billion
Edible Fruits and Nuts: $10.86 billion
Edible Vegetables and Certain Roots and Tubers: $9.53 billion
Preparations of Cereals, Flour, and Pastry Products: $2.83 billion
Sugars and Sugar Confectionery: $2.17 billion
From China ($4 billion):
Fish and Seafood: tilapia and shrimp, etc.
Processed Fruits and Vegetables: apple juice concentrate and canned vegetables.
Tea and Spices: garlic, ginger, cinnamon, etc.
Adding to the economic pressure and complexity, the U.S. has a surplus of corn and soybeans that will certainly be targets of retaliatory tariffs again. In response to the 2019 tariffs and trade dispute, the U.S. Government had to bail out domestic farmers with up to $1.4 billion to purchase surplus commodities affected by trade disputes.
While the motivations behind the policies may include protecting domestic industries and jobs, the unintended consequences will be price increases for groceries and restaurants. In an economy still reeling from inflation fatigue with the last bout barely contained, a return to escalating prices could put a economic growth in jeopardy.
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