President Trump frequently promotes the idea that when the United States places a tariff on imports from another country, that country pays the bill. This is simply untrue, but he keeps saying it.
For example, this was one of his recent tweets: “Billions of dollars will soon be pouring into our Treasury from taxes that China is paying.” Mr. Trump repeated it in a news conference. He then again wrote something similar on Twitter: “Billions of Dollars are pouring into the coffers of the U.S.A. because of the Tariffs (sic.) being charged to China, and there is a long way to go. If companies don’t want to pay Tariffs (sic.), they will build in the U.S.A. Otherwise, it just makes our Country (sic.) richer than ever before!”
Well, no, Mr. President, they won’t, because there is a vibrant market for low-cost steel from South Korea — and you have exempted them from the steel and aluminum tariffs.
The whole tariff issue raises an important question. Who gets “charged” for tariffs? The Chinese government? No. The Chinese manufacturer? No.
When the United States imposes a tariff on a Chinese import, it does not send a bill to China. If an American company contracts to buy a manufactured good from China and the product is subjected to a tariff, the company doesn’t get a bill from the government either. So, who pays the tariff? Companies that contract to buy products from abroad hire what’s known as an importer of record, someone whose job it is to navigate the intricacies of customs duties. Tariffs are simply a charge placed on an import, and when an imported good enters a port in the United States, the importer of record gets the bill and pays the tariff.
Do middlemen carry the burden of the tariff’s cost? Well, no, because they immediately pass on their costs to those who ordered the import, such as Best Buy or Costco. And what do they do about those extra costs? They pass them on to consumers in the form of higher prices.
Of course, companies, if they are smart, can also try to minimize tariffs, as noted above, by switching to suppliers who are exempt from the tariff. In the case of China tariffs, that could mean moving a factory from Beijing to Seoul, and no one pays the tariffs. The company is making an end-run around them.
When the importer pays the tariff, where does that money go? To the United States government. Mr. Trump is correct that his tariffs are bringing dollars into federal coffers. Revenue from tariffs exceeded $5.5 billion in October. But even over the course of a year, it isn’t nearly enough to counter the sharp increases in the federal budget deficit that Mr. Trump has overseen.
Despite Trump’s stated goal of reducing the United States trade deficit through the tariffs, between his inauguration and now, the deficit has grown by $119 billion. Last month, the U.S. Department of Commerce stated that in 2018 the trade deficit reached a record $621 billion.
Morgan Stanley estimated that Trump’s tariffs on steel, aluminum, washing machines and solar panels covered only 4.1 percent of U.S. imports. And, the tariffs angered trading partners, which implemented counter-tariffs on U.S. goods. Canada imposed retaliatory tariffs July 1, 2018.
China implemented tariffs equivalent to $34 billion. India has announced trade penalties valued at $1.2 billion. Then, after China imposed its retaliatory tariffs on American agricultural products, the Trump administration announced that it would use the Commodity Credit Corporation to pay farmers up to $12 billion from the federal treasury to essentially reimburse them for lost sales due to trade war reaction tariffs imposed by China and the European Union. Who carries that $12 billion cost? American taxpayers.
In a university lecture 40 years ago, Milton Friedman, the prince of laissez-faire economics, quoted and agreed with Adam Smith in saying that tariffs are an artificial barrier to trade that has two negative effects. First, they increase prices in the imposing country. Second, they bring about inevitable counter-tariffs that hurt the imposing country in an equal or greater amount, essentially negating any imagined benefit. He also commented that no internationally recognized economist has been a proponent of tariffs on international trade.
So, Mr. President, you should acknowledge that any tariffs imposed on imports of goods bought by American citizens will not be paid by the originating country, but will ultimately be paid as an indirect tax on the American people. China is not paying — no more than Mexico is paying for that wall.