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Trump’s Tariffs Only Work if Americans Pay Them

President Trump is fond of saying China “pays” the tariffs he imposed, and a lot of journalists (including me) are fond of pointing out the tariffs are actually paid by Americans. Specifically, they are paid by American importers of foreign goods, who presumably seek to pass the cost of the tariff on to end consumers.

The New York Timespoints to recent economic research on Trump’s tariffs, including two papers estimating that 100 percent of the cost of tariffs is being borne by American consumers. One of the research teams determined this by looking at changes in the price indices for highly specific goods. They found products not subject to new tariffs had approximately flat prices, while products subject to new tariffs went up in price approximately proportionately to the tariffs imposed. That’s pretty straightforward: Americans pay.

But other commentators like to point out this isn’t a law of nature: The person who remits a tax is not necessarily the person who bears the economic cost of the tax, as you can already tell from the fact we’re assuming a tax paid by importers gets passed through to consumers. What if it gets passed somewhere else? For example, what if it gets passed back to the Chinese exporter, who must cut his prices so the American importer is still interested in buying his goods?

Tyler Cowen, for example, takes issue with headlines like “China isn’t paying.” Cowen argues, convincingly, that China is likely to face substantial economic costs from the tariffs in the long run. But I don’t think that observation is in conflict with the idea that Americans bear the tariff costs in full. That’s because there is more than 100 percent of the tariff to go around. Tariffs are explicitly designed to create what is called a deadweight loss; not only do people pay the tariff, they also make inefficient choices to avoid paying the tariff, reducing economic output. So, the economic cost of a tariff exceeds the amount actually collected by the government. American consumers can pay the whole amount of tariffs actually collected and there can still be plenty of economic loss left for China to bear, too.

The assumption that tariffs are borne by American consumers is embedded in Trump’s eagerness to impose the tariffs in the first place. The point of a protectionist trade policy is to make it more economical to produce goods in the United States. This is where the deadweight loss comes from: Economic actors, seeking to avoid the tariff, move toward producing things somewhere other than the place where it costs least, and this reduces overall economic output.

This only works if the tariff is allowing American producers to sell at a higher price than they could if they faced tariff-free (or lower-tariff) Chinese competition. If Chinese producers ate 100 percent of the cost of the tariff, then Chinese goods wouldn’t go up in price for American buyers. American manufacturers wouldn’t gain any pricing leverage, and American consumers wouldn’t have any reason to change what they buy. If Americans didn’t really pay the tariffs, they would be pointless.

Of course, tariff advocates could say higher prices are desirable (though Trump won’t say that out loud). Those higher prices go to support an American industry; they reflect the fact that tariffs have protected certain American workers from competition with Chinese people willing to work for less. Unfortunately, there are offsetting effects. Higher prices reduce disposable income, meaning people buy less of something, costing jobs somewhere. And retaliatory tariffs and economic weakness in China lead to less demand for American exports.

In the medium term, Cowen thinks the tariff burden on American consumers will abate as production moves away from China to countries poorer than China which are not subject to punitive tariffs, such as Vietnam. If this is true, it will mean Americans are paying less in tariffs because less in tariffs are being paid overall, not because the cost of the tariffs starts being borne by someone in China. And if this is true, it again undermines the purpose of Trump’s tariff policy, which presumably is to shift production toward the United States, not toward Vietnam.

In practice, the economic effect of Trump’s tariffs has not been especially large, at least so far. Both of the papers discussed by the Times found a welfare loss to Americans of about $20 per person from Trump’s tariffs in 2018. This is why higher prices of specific goods particularly affected by tariffs, such as washing machines, have not led to a perceptible overall spike in inflation. But Americans are paying — and as the tariffs get bigger, we will be paying more.

|Daily Intelligence

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