Prominent Wall Street economist sees two ways tariffs could impact — and neither is good for the average worker
Flying between Helsinki, Prague, Milan and Geneva to meet with clients, Nathan Sheets, Citigroup’s top economist, gets a bird’s-eye view of how tariffs are reshaping the global economy.
But on the ground, he warns, the consequences of President Donald Trump’s new tariff war are playing out in ways that will hit ordinary Americans hardest.
“We haven’t seen tariffs of this level in the United States for many decades,” he said. Fortune on the way to Zurich. “So this implies that we learn how tariffs affect the economy in real time. »
Sheets, who also served in former President Barack Obama’s administration as the U.S. Treasury’s top economic diplomat, estimates that U.S. consumers currently bear about 30 to 40 percent of tariff costs — but that figure is poised to rise to about 60 percent as businesses run out of room to absorb rising import prices. “Businesses can only absorb so much,” he said. “They will have to make more of an effort with the consumer.”
Sheets is not alone among Wall Street economists in making this claim. Earlier this week, Morgan Stanley’s chief economist, Michael Gapen, said businesses had absorbed the shock as much as they could and that the tariffs were effectively a “tax on capital,” at least so far.
This transfer is already starting to show up in the data, Sheets added, although unevenly. Inflation of goods in several categories has accelerated since tariffs took effect earlier this year: audio equipment up 15%, furniture and bedding almost 7%, tools and equipment up about 4%.
Most of these products are imported products, things that appear in your household and not in your grocery cart, he said.
Slow pressure
Sheets believes retailers will pass on the effects of tariffs in subtle ways, through key “pricing windows” when they are already likely to raise prices, such as during the holiday and New Year shopping period.
Businesses can afford to do so, he explained, because they built up inventory before the tariffs were imposed and reduced their inventory more cost-effectively. But that cushion is running out.
“We’re starting to see it,” he said. “By spring, this will be more visible in the data.”
The economist said businesses walk a fine line: Consumers are still “fatigued” by post-pandemic inflation and are in no mood to tolerate another round of price increases, but businesses can’t continue to bear the costs forever.
“One thing you don’t want to do is raise your prices, drive your customers crazy, and then have the rates adjust downward,” he added. “So they are carefully evaluating their ability to get it through and the timing in which they do it.”
The manufacturing mirage
The second way tariffs could manifest, Sheets warns, would be a sort of snake-eating-its-own-tail effect: harming the U.S. manufacturing base they’re supposed to protect.
“There is a fundamental reality here,” he said. “Wage rates in the United States are relatively high. If you look at using American labor and paying them competitive wages, there are just certain types of manufacturing activities that are very difficult to do profitably.”
This, he says, is why so many jobs have moved to China and Mexico over the past 40 years — and why tariffs can bring factories back, but in a “very capital-intensive” way: think machines, not more workers.
“Companies will say, ‘I can’t afford American wages for this business, so I’m just going to fully automate it,'” Sheets said. You bring back production, you bring back investment, but you don’t bring back as many jobs.
Trump, on Liberation Day, promised to usher in the “golden age” of manufacturing and to relocate production thanks to his tariffs. But Sheets says it might just have accelerated the trend toward factory automation with AI and advanced robotics, making it easier than ever to run a factory with fewer people.
“We saw it with the computer revolution,” the economist said. “Some jobs disappear, new ones appear, but they are not the same jobs. »
A fragile world order
Sheets said that for now, most U.S. allies are taking a “wait and see” approach rather than retaliating with tariffs of their own, largely because they are still dependent on access to the U.S. market.
But he warned that if more countries followed Washington’s lead and began weaponizing tariffs, the global trading system that defined the postwar era could begin to fracture.
He compared the situation to the early 1930s, when the Smoot-Hawley tariffs triggered widespread retaliation and a collapse in global trade that deepened the Great Depression. At the time, the world turned in on itself and the result was “devastating,” he said. He warned that, thank God, other countries have not followed the United States’ lead – until now.
Still, Sheets said he believes it is possible to rethink — not abandon — the economic order that has been in place for decades. World leaders have done this every forty years or so: in the 1940s, they created the IMF and the World Bank, and in the 1980s and 1990s, with the development of the WTO.
“Perhaps it is time to think more deeply about how we can have an effective global trading system,” he said.
