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August 16, 2018

Who Pays Tariffs?

 

It’s back to first principles time, as it’s clear from social media and news reports that there are misunderstandings about the basics of how tariffs work, especially among those who seem to be their strongest proponents.

It’s true that tariffs were once a major source of tax revenue for governments, including the US. It’s also true that the US imposed tariffs on a variety of goods prior to the Trump administration. And it’s further true that, prior to the Trump administration, average US tariffs were significantly lower than those of our trading partners.

What’s NOT true is that tariffs on goods from China are paid by the Chinese, or that tariffs on goods from Mexico are paid by Mexicans.

When the United States levies a tariff on something, it is the US importer who pays the tariff, not the foreign exporter. A tariff is a border tax on the buyer, not the seller—tariffs make it more expensive for a buyer to import a good into the country.

The specific mechanism is that the US importer must pay the tariff to US Customs before the goods are released to the importer at the border. And now the importer, having had a significant additional cost imposed, must pass along as much of the increased cost as possible to consumers and businesses.

The primary purpose of the Trump tariffs isn’t necessarily to raise tax revenue, as in centuries past, but to make something more expensive to US consumers so that they will buy less of that item and buy more from domestic manufacturers, who, incidentally, typically raise their domestic prices. So US tariffs directly harm US businesses and consumers in an attempt to indirectly affect foreign exporters.

That means, for instance, that if the United States imposed a tariff on goods coming from Mexico to pay for a border wall, it would be the US businesses and consumers, not Mexico, that paid for the wall.

Whether a tariff is justified is a separate discussion. Perhaps they are, under certain circumstances, although the current “national security” justification is an embarrassing fiction. But any discussion about tariffs should at least be informed by an accurate understanding of who actually pays.

And who pays the Trump tariffs? Americans, that’s who—as importers of tariffed products, businesses that buy those imported items, and, ultimately, consumers.


 

  • TaxBytes-New

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