President Donald Trump has argued that the cost of his tariffs on China will fall largely on the Chinese. The reality is more nuanced, said Robert Kudrle, Freeman Professor of International Trade and Investment Policy at the University of Minnesota. The buyers of products are the ones who actually pay a tariff, though there could also be effects on prices that would shift some of the cost back onto the sellers.
To date, the United States has imposed 25% tariffs on $200 billion worth of Chinese products and parts purchased by U.S. businesses. Trump decided earlier this month to impose the 25% tariffs on a wide range of consumer products after talks to reach a trade deal did not yield an agreement. He has said he could impose them on another $300 billion of Chinese goods.
Kudrle said U.S. companies and American consumers are likely to pick up a significant part of the tab. He sought to set the record straight in a question-and-answer session with the Star Tribune.
Q: What is a tariff?
A: A tariff is a tax on imports. The tax is levied at the port where the import arrives after its value has been determined.
Q: Who pays the tariff?
A: The buyer pays the tariff although the seller may sometimes lower the selling price. Studies of product prices subject to recent tariffs show that the huge increase in tariff revenue that the president cites were paid overwhelmingly by U.S. businesses and U.S. consumers. The U.S. buys a vast range of products and parts from China from low-end products to high-tech. For instance many medical devices include an important amount of Chinese content. Such U.S. businesses become less competitive exporters.
Q: Is there a tipping point where tariffs get so high that companies have to pass them along to consumers in the form of price increases?
A: There is pressure whenever you add cost. You might temporarily take a lower profit margin, but the main impact is to increase prices and perhaps to change the source of supply.
Q: What about the president’s advice to buy American instead of Chinese?
A: If a business goes to an alternative source of products or parts, it is still likely to be a non-American source. It will probably be countries where products were slightly more expensive than China before the tariffs, places like Taiwan, Malaysia, Vietnam or Mexico.
Q: So do you think the tariffs will help the U. S.?
A: Tariffs are not going to build the American economy; they do the opposite. They could at best be a lever to get the Chinese to respect international practices, particularly with respect to intellectual property. But instead of cooperating with allies, we chose to alienate them and confront China on our own.
Q: When do you think Americans will feel the effect of tariffs?
A: They already have. There is an estimate of the annualized cost to Americans of the recent tariff increases of $400 per year for a family of four. The costs are from tariff payments and the loss of gains from previous trade. That’s a lot bigger bite from a low-income family than a high-income family. These tariffs are very regressive.
Q: Will the costs to Americans go up with the new tariffs?
A: It is estimated that with the recently announced tariff increases, the cost could go up to $800 for a family of four.
Q: Could these tariffs help individual Americans?
A: They make the pie smaller, and there is no way to divide a smaller pie to give everyone a bigger piece.