resident Donald Trump has repeatedly declared that China is paying for the tariffs he has imposed under his trade war against the Asian economic powerhouse. But not only is this false in its literal sense, it’s misleading figuratively, too.
Trump just jacked up tariffs from 10 percent to 25 percent on a long list of Chinese goods worth $200 billion, ranging from food, to materials, to electronics, to chemicals, and much more besides. China is hitting back with its own retaliatory tariffs.
The president is using tariffs as a cudgel to force China to the negotiating table. He wants a better deal for America and for China to crack down hard on anti-competitive practices such as intellectual property theft, which is rife, and heavy subsidizing of industries, like steel.
Those negotiations on a new trade deal appeared to be going well until Trump accused Beijing of walking back on previous commitments and went ahead last Friday with a delayed increase in tariffs on Chinese goods, in addition to those that already exist.
A further $325 billion of Chinese goods are in line for tariffs if Trump deems it necessary.
President Trump has tweeted that China is « paying tariffs to the USA, » that « there is no reason for the U.S. consumer to pay the tariffs, » and that « the tariffs can be completely avoided if you buy from a non-tariffed country, or you buy the product inside the USA (the best idea). »
A tariff is a tax on an import. For example, let’s say there is a 25 percent tariff on washing machines imported from China. If an American company imports a washing machine from China, it will have to pay a tax to the federal government amounting to 25 percent of the price.
The question of who pays that 25 percent tariff depends upon the circumstances. At face value, the importer pays the tariff. While profitable companies could absorb that cost by reducing their profits, they might offset it by passing the cost on to someone else.
The importer could cut its costs, perhaps by letting employees go or investing less money. That means the burden would fall on those who are now unemployed, or the other companies losing business because their customer is no longer making purchases.
American importers might also raise prices, so consumers pay the cost instead—and there’s evidence that this is happening because of Trump’s tariffs.
To continue with the washing machine example, the Congressional Research Service found that Trump’s tariffs correspond with a 12 percent rise in washing machine prices paid by American consumers.
It’s also worth remembering that American companies aren’t just importing finished products from China. They’re also importing parts and raw materials for products that are manufactured in the U.S.
So even if a washing machine was built here, its supply chain may rely on parts imported from China, which will raise the cost of production, and likely the retail price.
The bottom line: Tariffs push prices higher, consumers spend less money, businesses sell fewer products, and the American economy takes a hit.
However, there are scenarios where the Chinese might pay indirectly for the tariffs. An American importer could, for example, seek a discount or a payment from the Chinese exporter to offset the tariff cost.
If the Chinese exporter needs or wants to keep the business—perhaps hoping to ride out the tariffs in the hope they are only temporary—they may do this, in turn passing the cost along at their end of the chain.
The Chinese may also lose custom as American importers look elsewhere for the products. Trump hopes his tariffs will spur on domestic purchasing as American businesses buy from other American businesses instead of importing what they need.
But this is a simplistic understanding and the evidence shows neither is currently happening.
American companies may not have the capacity, in the short-term at least, to offset the reduction in supply of certain goods from China by increasing their own production. Instead, they’ll raise prices.
Moreover, businesses importing from China tend to do so as a means of reducing their costs because Chinese goods are cheaper. This improves their profitability and allows them to invest money growing their businesses, such as by hiring more staff, building new factories, and so on.
Without access to cheaper imports, their ability to grow the business—and perhaps even to survive in the worst cases—is hindered.
A March 2019 paper by the National Bureau of Economic Research, which looked into the data around the impact of Trump’s tariffs, concluded that the costs were almost entirely borne by American consumers and importers.
There was, the study’s authors found, « no impact so far on the prices received by foreign exporters. » Moreover, American producers had, in fact, responded to the reduction in Chinese competition by raising their prices.
Those price rises led to a reduction in the real income of American consumers of around $6.9 billion during the first 11 months of 2018. There was also an additional cost of $12.3 billion to domestic consumers and importers transferred to the government in the form of tariff revenue.
By November, the costs to consumers’ real incomes alone from higher prices had reached $1.4 billion per month. “Our results imply that the tariff revenue the U.S. is now collecting is insufficient to compensate the losses being born by the consumers of imports,” the study said.
According to the Congressional Budget Office, Trump’s China tariffs—even before the latest hike in May—equate to a 0.1 percent drop in the annual rate of U.S. GDP growth rate on average until 2029.
The International Monetary Fund (IMF) estimates a 0.2 percent reduction, increasing to 1 percent with the latest tariffs and new retaliatory levies on U.S. autos by the Chinese.
There’s an old adage: Nobody wins a trade war. But while the U.S.-China tariff battles are Pyrrhic for both sides, one thing is clear, despite what Trump wants to believe: American consumers and businesses are paying a big price for them.