Realist, not conformist analysis of the latest financial, business and political news

Of Course Import Tariffs Are Paid By Domestic Consumers, Not Foreign Manufacturers

Donald Trump proudly proclaims that US customs revenue is up as a result of all those tariffs he’s imposed upon imports. Great, except it’s not the foreign manufacturers who are paying these tariffs, it’s US domestic consumers who are. Don’t forget that in economics the person who hands over the check isn’t necessarily the person who is bearing the economic burden of the payment. Our employers hand over the stoppages out of our own paychecks to the government but absolutely no one is saying that our employers are paying our income tax for us.

Who is actually paying, in that real sense, any particular tax is the study of incidence. And this is something economics knows a lot about.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] President Donald Trump is right to say that his tariffs are generating billions of dollars for the U.S. But China and other countries aren’t paying them as he’s suggested. According to data from U.S. Customs and Border Protection, more than $13 billion in duties imposed by the Trump administration were assessed on imported goods as of Dec. 18. Actual collections could lag and be lower because of refunds and other factors, but Treasury Department reports show receipts from all customs duties have risen sharply since the tariffs took effect. While Trump has suggested on Twitter and in public comments that tariffs are somehow being charged to or paid by China and other countries, trade economists say that’s generally misleading. U.S. importers of record are responsible for the duties, and ultimately U.S. businesses and consumers could pay through higher costs, they say. [/perfectpullquote]

There’s no could about it. It’s would and will.

It is possible to construct a model in which those foreign manufacturers really pay. The tariffs make their goods more expensive. Thus fewer of them are sold, they lose the profits from those sales. But think now what’s happening on the other side. For those imports that still do come in the American consumer is paying more. That’s definitely being paid by the American consumer therefore. The money actually collected in tariff revenue must be being paid by the consumer.

It’s also true that the foreign manufacturer might accept lower profit margins in order to keep the business.

But it gets worse than this. Because in the absence of that foreign competition all domestic producers of the same goods or substitutes now can and will raise their prices. Which doesn’t affect those foreign manufacturers one whit but is a cost to American consumers.

What matters is the balance of these effects. And here’s the little secret about incidence. There’s nothing at all to say that all of the people paying the tax together amounts to only the amount of the tax. It’s entirely possible – in fact it’s entirely usual – for incidence to be over 100%. Which it is with tariffs. The combined losses to both consumers and foreign manufacturers is more than the total tariff revenue. In fact, add together all the higher prices paid by consumers alone and that’s more than the tariff revenue.

It’s not just that foreigners aren’t really paying Trump’s tariffs, American consumers are, it’s that American consumers are paying more than the total tariffs being collected.

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Rhoda Klapp
Rhoda Klapp
4 years ago

The punter always pays.

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