It would be hard to miss the headlines that the U.S. and China are in a trade war, but many people do not understand what tariffs are, who pays them, and how they actually affect consumers. (Learn more about the current state of the trade war HERE).
What is a Tariff?
Put simply, a tariff is a type of government tax placed on imported goods that are made in another country.
How Tariffs Work
Historically, tariffs have been imposed to provide protection for or encourage development of a specific domestic industry. The idea is that, if specific foreign goods become more expensive, then hypothetically, the demand for those same products made locally increases. This in turn increases domestic manufacturing of that particular good, which naturally involves hiring more employees, increased profits, paying more taxes, and ultimately leading to growth of the national economy.
A positive outcome of tariffs, as previously described, can be seen in the first tariffs that date back to the late 11th and early 12th century England. During this age, tariffs were used by kings to grow the practically non-existent domestic wool manufacturing industry. After a few hundred years, the tariff policies (along with other factors) helped transform England into the world’s largest wool manufacturing nation for centuries to come. In fact, English wool is still famous today.
While the English wool tariffs are considered a success story, it’s important to consider the negative effects, both locally and globally, that can also result. It took centuries for the English wool industry to fully develop, and the rulers weren’t particularly concerned about the suffering of the poor during a significant economic overhaul. What happens if tariffs are imposed and alternative domestic-made goods are not available? In this case, the consumer is forced to pay much higher prices for goods they need, which can hurt the domestic economy.
Who Pays For Tariffs?
When importing goods, the importer is responsible for paying the tariff. An importer can be an individual, a domestic company, or a registered unit of a foreign company. In the United States, Customs and Border Protection (CBP) collects the tax after the importer’s product enters the country. This same process happens in China and in countries around the world.
President Trump has repeatedly claimed, in the context of the U.S./China trade war, that China pays for the tariffs. When looking at who imports goods from China into the U.S., the vast majority are U.S.-based companies. If an American company manufactures goods in China that are on the tariff list and imports those goods into the U.S., then that American company will pay the tariff fee.
However, an importer can also be a U.S.-registered unit of a foreign company. This means that if a Chinese company operating in the U.S. imports Chinese goods into the U.S. for sale, then that Chinese company would pay the tariff. In this scenario, one might be able to make a weak argument that “China pays for the tariffs,” but this scenario is fairly uncommon, and the Chinese company is paying the tariff, not the Chinese government.
Ultimately, it is an untrue statement to say that China pays for the tariffs. But what if President Trump really means that China is hurt by the tariffs when he says “China pays for the tariffs.” Let’s investigate that in the next section.
How Tariffs Affect Consumers
Tariffs leave importers with two main options — either absorb the cost and generate less revenue or pass along the cost to their customers by increasing the price of their product. Most importers affected by the U.S./China trade war have been using a mix of both options to mitigate losses. Either way, Americans, especially consumers, end up paying more.
There is a third option. In some cases, American importers can threaten to move their supply chain to another country that has lower duties or is tariff-free. Some Chinese exporters have been forced to offer U.S. importers a discount to help defray the costs of higher U.S. duties, in order to keep their manufacturing customers. Once again, this scenario could be loosely interpreted as “China pays for the tariffs” in the sense that Chinese businesses are hurt and the Chinese economy is negatively affected. However, moving a long-established supply chain is exceptionally difficult and risky; savvy Chinese manufacturers can call U.S. importers’ bluff on moving their supply chain.
Plus, even if these tariffs imposed on China bolstered a dormant U.S. manufacturing industry, labor costs in the U.S. are much higher than overseas, meaning U.S. consumers would still have to pay a higher price for U.S.-made goods.
Tariffs are a government tax paid by importers. In the context of the U.S./China trade war, it is U.S. companies and consumers that bear the burden of this tax, not China. Some might argue that tariffs have historically bolstered domestic industries, but in the case of the U.S./China trade war, it is much more likely that U.S.-based companies will move their supply chain to different low-wage countries before they would consider bringing their production back to the U.S.A.
While China may be paying for the tariffs in the sense that the Chinese economy is being negatively affected, this discounts the profound negative effects that the tariffs are having on the U.S. economy. Ultimately, both sides in the trade war lose in serious and far-reaching ways.
If you need help finding out how these tariffs affect your product business, contact us HERE.
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