Who Is Really Paying for Donald Trump's China Trade Tariffs? Spoiler Alert—It's Not Beijing

Donald Trump China tariffs trade war
President Donald Trump listens to a question from the media during a meeting in the Oval Office on May 13. Evidence reveals U.S. consumers and businesses are the ones paying the cost of the president's trade war with China. Mark Wilson/Getty Images

President Donald Trump has repeatedly declared that China is paying for the tariffs he has imposed in his trade war against the Asian powerhouse. But not only is this false in a literal sense, it's figuratively misleading, too.

Trump just jacked up tariffs from 10 percent to 25 percent on a long list of Chinese goods worth $200 billion, ranging from food to materials to electronics and chemicals, and more. China has hit back with its own retaliatory tariffs.

The president has been using tariffs like a cudgel to force China to the negotiating table. He wants a better deal for America, and for China to crack down hard on such anti-competitive practices as intellectual property theft, which is rife, and heavy subsidizing of industries, like steel.

Negotiations on a new trade deal appeared to be going well, until Trump accused Beijing of going back on previous commitments. Last Friday the president imposed a delayed increase in tariffs on Chinese goods, in addition to those that already existed.

An additional $325 billion of Chinese goods are in line for tariffs if Trump decides to impose them.

Trump tweeted that China was "paying tariffs to the USA," that "there is no reason for the U.S. consumer to pay the tariffs," and that "the tariffs can be completely avoided if you buy from a non-tariffed country, or you buy the product inside the USA (the best idea)."

A tariff is a tax on an import. For example, let's say there is a 25 percent tariff on washing machines imported from China. If an American company imports a washing machine from China, it will have to pay a tax to the federal government amounting to 25 percent of the price.

The question of who pays that 25 percent depends upon the circumstances. On face value, the importer pays the tariff. While profitable companies might simply absorb that additional cost, they could also pass it on to others.

The importer could cut its costs, perhaps by letting employees go or investing less money in the company. That means the burden of the tariffs would fall on those who are now unemployed, or on other companies that have lost business because their customers no longer have the money to buy their products.

American importers might also raise prices, so consumers pay the cost instead—and there's evidence that this is already happening.

To continue with the washing machine example, the Congressional Research Service found that Trump's tariffs corresponded to a 12 percent increase in washing machine prices paid by American consumers.

It's also worth remembering that American companies aren't importing only finished products from China. They're also importing parts and raw materials for products that are manufactured in the U.S.

So even if a washing machine was built here, its supply chain might rely on parts imported from China, which will raise the cost of production, and likely the retail price.

The bottom line: Tariffs push prices higher, consumers spend less money, businesses sell fewer products, and the American economy takes a hit.

There are, however, scenarios in which the Chinese might pay indirectly for the tariffs. A U.S. importer could, for example, seek a discount or a payment from the Chinese exporter to offset the cost of the tariff.

If the Chinese exporter needs or wants to keep the business—perhaps hoping to ride out the tariffs in the hope that they are only temporary—they might do this, in turn passing the cost along at their end of the chain.

The Chinese might also lose out as U.S. importers look elsewhere for the products. Trump hopes his tariffs will spur domestic purchasing as U.S. businesses buy from other U.S. companies instead of importing what they need.

But this demonstrates a simplistic understanding, and the evidence shows neither scenario is currently happening.

American companies may not have the capacity, in the short-term at least, to offset the reduction in supply of certain Chibnese goods by increasing their own production. Instead, they'll raise prices.

Moreover, businesses importing from China tend to do so as a means of reducing their costs, because Chinese goods are cheaper. This improves their profitability and allows them to invest in their businesses, such as by hiring more staff, building new factories and so on.

Without access to cheaper imports, their ability to grow their businesses—and perhaps even to survive—is hindered.

A March 2019 paper by the National Bureau of Economic Research, which looked into the data around the impact of Trump's tariffs, concluded that the costs were almost entirely borne by American consumers and importers.

The study's authors found "no impact so far on the prices received by foreign exporters." Moreover, American producers had responded to the reduction in Chinese competition by raising their prices.

Those price rises led to a reduction in the real income of American consumers of about $6.9 billion during the first 11 months of 2018. There was also an additional cost of $12.3 billion to domestic consumers and importers transferred to the government in the form of tariff revenue.

By November, the costs to consumers' real incomes alone from higher prices had reached $1.4 billion per month. "Our results imply that the tariff revenue the U.S. is now collecting is insufficient to compensate the losses being born by the consumers of imports," the study found.

According to the Congressional Budget Office, Trump's China tariffs—even before the latest hike in May—equate to a 0.1 percent drop in the annual rate of U.S. GDP growth rate on average until 2029.

The International Monetary Fund estimates a 0.2 percent reduction, increasing to 1 percent with the latest tariffs and new retaliatory tariffs on U.S. cars by the Chinese.

There's an old adage: Nobody wins a trade war. But while the U.S.-China tariff battles have proved Pyrrhic for both sides, one thing is clear, despite what Trump wants to believe: American consumers and businesses are paying a big price for them.

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