Who pays the tariffs in a trade war?
Trade war! As the United States and China impose tariffs and retaliate with further tariffs, it’s worth asking a question: what’s the economic impact of all this?
You see, if you listen to some people, you might assume that when the US imposes a tariff on Chinese goods, Chinese firms pay the tariff. This is not correct.
First, a little economic theory. A tariff is a tax on imports. It is a form of trade protection that makes imported goods more expensive (less competitive, less desirable) and makes locally produced goods more relatively cheaper (more competitive).
In 2019’s trade war, US President Donald Trump has been vocal about how China is paying for the tariffs. He’s portrayed this measure as a punishment for Chinese producers. But the ones who are really suffering are US consumers and companies.
This is the view of an excellent article by Reuters’ Rajesh Kumar Singh. It’s really outstanding. Here’s what he says about the true impact of the tariffs:
Singh’s excellent article.
“Importers often pass the costs of tariffs on to customers - manufacturers and consumers in the United States - by raising their prices. US business executives and economists say US consumers foot much of the tariff bill.”
And this:
“Stephen Lamar, executive vice president of the American Apparel & Footwear Association, said the new tariffs would hit US consumers far harder than Chinese manufacturers, who produce 42% of apparel and 69% of footwear purchased in the United States.”
Singh goes on to discuss how major stores in the US, such as Walmart and Macy’s, have warned of higher prices for shoppers due to the tariffs on imported Chinese goods. Indeed, Singh cites research conducted by the Federal Reserve Bank of New York, Princeton University and Columbia University that shows US companies and consumers have paid US$3 billion a month in additional taxes because of the tariffs on Chinese goods and global metal imports.
So, what’s the point here? I think it’s important to note that while the goal of the US’ protectionist measures are to punish China, they are ultimately punishing US consumers. This is because, even with the tariffs, consumers need to purchase Chinese goods. There are no viable alternatives. China produces too much of the stuff we need and want. Consumers pay the tax.
Furthermore, by punishing US consumers, this could slow US domestic growth and lead to lower global growth. Which could negatively affect Australia.
“Stephen Lamar, executive vice president of the American Apparel & Footwear Association, said the new tariffs would hit US consumers far harder than Chinese manufacturers, who produce 42% of apparel and 69% of footwear purchased in the United States.”