Economic Perspective: Who Pays the Tariffs?

MARY WALDEN:

“Today’s program asks who pays the tariffs. Mike, although the trade dispute with China can change on a day-to-day basis there are still significant tariffs on imports to the U.S. from China. A tariff on imports raises the price of those imports, but there’s a question of who effectively pays those tariffs. I understand we have some new answers.”

MIKE WALDEN:

“Well let me give a specific example of this. Let’s say that you are a retailer, and you are importing smartphones from China. China assembles a lot of smartphones, and there’s a tariff on it. Let’s say a 30 percent tariff. So for every dollar that smartphone costs, the importer will have to pay another 30 cents on that. Although the importer does pay the 30 cents, the affective person, or the affective entity, that pays that could vary.”

“For example, the importer could say to the Chinese company that assembles the phones, “Hey, you’re going to have to absorb that 30 cents. We’re not going to.” Or the importer could say that we’re going to pass on the 30 cents for every dollar to the buyer here in the U.S. So there’s a question of who really pays the tariff. Is it the company in China in this case? Is it the importing company here in the U.S, or is it the consumer who buys, in this case, the phone?”

“Well we now have some new research from the Federal Reserve and Harvard, combined, and what they have found during this trade war with China is that in most cases it’s the importing company in the U.S. who effectively pays that tariff. They absorb that. It comes out of their profits.”

“So they don’t pass it on to consumers, the Chinese company doesn’t pay it, it’s that importer. Well you might say, “That’s good. The company’s aren’t hurting us.” Well it’s good in that sense, but it’s bad in that it’s going to reduce the rate of return, the profit if you will, of those companies which means they might lay off people. It means they may actually buy fewer smartphones from China, et cetera, and that’s the concern that many of us have with respect to the trade war. It’s making business in the U.S. less profitable which could lead to adverse consequences in the U.S. for the economy as a whole.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.