The Price of Tariffs on Fifth District Businesses

Introduction

December data from our monthly business surveys and fourth quarter data from The CFO Survey suggested that firms were optimistic about their own businesses and the overall economy going into 2025. This rise in optimism, however, was accompanied by several concerns. One concern was the potential for additional tariffs on imports.

One way to gauge the potential impact of tariffs on firms — especially in December before there were more specifics about future tariff policy — was to gauge their international exposure. Most December survey respondents reported that they do not sell goods or services abroad; however, most source at least some of their inputs from abroad. Although some research finds tariffs to be temporarily inflationary, among our survey respondents, there was little evidence that international exposure is correlated with firm-level price expectations. Anecdotally, many survey respondents have seen or expect to see impacts from tariffs, but the extent, or even direction of the impact varied across respondents.

Survey Respondents and International Exposure

Among survey respondents, sourcing from abroad was more common than selling abroad. Only 33 percent of December survey respondents reported that they sell any goods or services abroad, and most of those firms sell less than a quarter of their product outside of the United States. On the other hand, the majority (66 percent) of respondents reported sourcing some of their inputs internationally, and 11 percent of respondents source more than half of their inputs internationally.

The More International Exposure, the More Firms Expressed Concerns About Tariffs

The businesses that sourced inputs from abroad were more likely to report concerns about tariffs. Of the 66 percent of firms that sourced from abroad, 21 percent reported concerns about tariffs, compared to 5 percent of firms that do not source inputs globally. For example, one Virginia furniture retailer noted, "Blanket tariffs on imports from around the world would affect our business both directly through our international imports and indirectly as our clients have to pay more for everyday items. We are extremely concerned about any new tariffs." Similarly, a gasket manufacturer in North Carolina said, "[Our] biggest worry is about potential tariffs that may hit our raw materials coming from Germany and Japan."

Despite these concerns, firms did not report expecting a change in their sourcing or their selling in the next year or even three years, although there was also a fair amount of uncertainty. When asked if they expect change in their international exposure (sourcing or selling), 64 percent anticipated no change in the next year, and 48 percent expected no change in the next three years. However, firms that reported sourcing inputs internationally were more likely to anticipate a change in their international exposure than those that reported sourcing none of their inputs from abroad.

What About Cost and Price Expectations?

Although businesses with more international exposure were more likely to be concerned about tariffs, there was not a clear relationship between tariff concerns and cost or price expectations. In other words, there was no clear evidence that firms that were concerned about tariffs expect their costs or their prices to grow at a faster rate in 2025 than those that did not explicitly express a concern about the impact of tariffs on their businesses. Regardless of the share of inputs that businesses sourced from outside of the United States, businesses, on average, expect the prices they pay suppliers to grow by about 4 percent in 2025. Additionally, businesses that source inputs from outside of the United States still expect between 3 to 4 percent growth in what they charge their customers, which is similar to those firms that do not source internationally.

The same applies when comparing growth in the prices that businesses expect to receive from customers by the share of products or services sold outside of the United States. In fact, businesses that sell their outputs internationally expect lower growth in prices received from customers than those businesses that only sell domestically.

Of course, there are firms that do expect to see their costs increase and to pass those costs through to customers. For example, a Virginia industrial equipment supplier reported, "The threat of tariffs on imports could increase our raw material costs and the costs of goods that we wholesale."

What Do Firms Say About the Impacts of Tariffs?

The expected impact of tariffs varied notably across firms. Some of this is due to continued uncertainty around tariff policy: Firms were unsure about the size of tariffs, the countries affected, and the implementation. A transportation equipment manufacturer in South Carolina acknowledged that "...the uncertainty regarding tariffs seemed to have created order decline without clear economic indications." However, another South Carolina firm — a print manufacturer — had a different take. That survey respondent reported "...a surge in orders over the last four to eight weeks. Customers responded to the thought that tariffs will increase prices in the future, so it is best to order now. We expect a slowdown, or at least return to normal, sometime next year."

Conclusion

As we move into 2025, the implementation of tariffs is top of mind for many businesses, although exactly what the policies will be and how they will affect Fifth District firms is still uncertain. While Fifth District businesses watch the development of trade policy that might impact their firm, we will be watching for the impact on our regional and national economy.

This information was collected from firms via our December business surveys fielded Dec. 2 through Dec. 18.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.