The Tariff Mismatch

Regardless of the apparent benefit to consumers of tariff cuts, "consumers have to have jobs [in order] to consume," said Augustine D. Tantillo, executive director of the American Manufacturing Trade Action Coalition, a group representing many textile firms based in the Southeast.

To that argument, the administration and its free-trade allies respond that an abundance of job creation will flow from the wealth and productivity generated by lower prices and additional international commerce. But industries that rely on tariffs also argue that they need to be sheltered against imports as a matter of fairness because some foreign countries subsidize their exporters. The dairy industry, for example, asserts that subsidized butter and cheese from Europe and elsewhere would wipe out U.S. dairy farmers without lofty tariffs on those products.

Finally, there is the question of whether tariff cuts would really translate into lower prices at the retail level. "It's a rather lofty assumption that the retail community would pass on these benefits fully to the consumer," Tantillo said.

No one can prove how much tariffs affect retail prices. According to one school of thought, tariffs are systematically passed on through each stage of the wholesale and retail process. A $3.20 tariff on a $10 acrylic sweater, for example, increases the cost to $13.20 for the importer, who marks up that price by some percentage -- say, 50 percent -- before delivering the sweater to a retailer, who marks it up again by some percentage of the wholesale cost. Thus the consumer ends up paying not only the $3.20 tariff but also markups on the tariff.

Many people familiar with the importing business say that's how the system often works. "I don't think there's any doubt that if tariffs are reduced, retail prices will go down even further," said Robert L. Steiner, a former business executive and Federal Trade Commission staffer who has published a number of scholarly articles on retailers' behavior. "And if tariffs go up, retail prices will rise even more."

Steiner has marshaled evidence to bolster the case. Using government data, he found that gross profit margins earned by retailers have stayed remarkably constant over a number of years, which suggests that they systematically mark up their merchandise based on their costs including tariffs.

Advancing an opposing view, Robert E. Scott, an economist at the liberal Economic Policy Institute, said his research suggests that retailers wouldn't reduce prices much if tariffs fell because big retail chains have increased their market power enough to charge higher margins.

The truth probably lies in between, according to economists who cite studies showing what happens to retail prices when changes in foreign currency rates affect the cost of imported goods. "About half of the benefit of lower prices gets passed through, and about half somehow disappears in markup adjustments," said Thomas W. Hertel, a professor at Purdue University who has studied the potential impact of a WTO accord.

Whatever the truth about markups and pass-throughs, the basic unfairness of the tariff system bothers LaCresia Jack, another Payless ShoeSource customer, when she is told that tariffs probably inflated the cost of shoes she is buying by some amount.

"Being a paralegal, I'm trying to get my mind wrapped around this," said Jack, who works for an Energy Department contractor. "Why wouldn't the things that cost the most be taxed higher, since the people buying them can afford them? This is a little backwards."

"The shop owners say, 'We're getting gouged -- we have to make our money,' " she continued. "Now I understand. They're getting gouged, and so are we."