Who pays for tariffs?
Americans, probably
PRESIDENT Donald Trump reckons foreigners will pay the cost of the $200bn in tariffs he plans on Chinese goods. Others disagree, claiming that tariffs will bite into budgets at home. Duties are payable by importers, but the question of who bears their burden is more complicated.
Foreigners can end up paying for tariffs if the prices they charge slump in response. For example, Douglas Irwin of Dartmouth College found that in 1897 foreign exporters absorbed at least 60% of an increase in sugar tariffs, as they dropped their prices to maintain access to the mighty American market. (That tale may sound familiar to soyabean farmers hit by Chinese duties.)
Consumers might also avoid part of the bill if the yuan depreciates against the dollar; it has done so by 8% since tariffs were formally announced in March. Although almost all imports from China are priced in dollars and contracts can be slow to adjust, Gita Gopinath of Harvard University suggests that firms may use the tariffs as an excuse to renegotiate.
So far, though, it is hard to see clear signs that prices are falling much, either in response to the tariffs or the yuan depreciation. Perhaps that is no surprise. Ms Gopinath points out that only around 30% of exchange-rate movements get passed through to prices. Chinese exporters use inputs priced in dollars that become more expensive when the yuan depreciates.
If prices do not fall, Americans can still sidestep the tariffs by switching to alternative suppliers. At first, the Trump administration seemed to be encouraging this approach, singling out products for which there were plenty of available alternatives. If alternatives comparable in price and quality were available, though, companies would presumably already be buying them. And so, as well as the hassle of switching suppliers, buyers will almost certainly face some sort of extra cost. As the tariffs turn from a chiselled list into one bludgeoning all imports from China, that sort of adjustment will be harder to make.
For many companies, switching may be easier said than done. Around half of the products threatened with tariffs are intermediate goods, used by companies to make other stuff. Mary Lovely of Syracuse University points out that the early tariff lists may have been designed this way to protect consumers. Yet given how customised intermediate goods can be, importers may struggle to find a ready alternative.
Supply chains can be complex beasts, requiring each component to be checked and tested. According to the Census Bureau, around a quarter of American imports from China come from a “related party”, which could include an affiliate, a subsidiary or a parent company. Where two companies are embedded in a supply chain or part of the same company, dodging duties may require moving premises.
If the tariffs stick around, then in time trade will adjust. Reports are emerging of companies considering moves to Vietnam. In response to the proposed tariffs on $200bn of Chinese imports, Greg Kirkpatrick, who works for a company making fancy shopping bags, said he was in favour overall. But as orders for the Christmas shopping season have long since been placed, he cannot renegotiate with his Chinese suppliers and is having to tell his customers that their prices will be anywhere from 10% to 25% higher. For now, at least, it seems Americans like him will pay.
Foreigners can end up paying for tariffs if the prices they charge slump in response. For example, Douglas Irwin of Dartmouth College found that in 1897 foreign exporters absorbed at least 60% of an increase in sugar tariffs, as they dropped their prices to maintain access to the mighty American market. (That tale may sound familiar to soyabean farmers hit by Chinese duties.)
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So far, though, it is hard to see clear signs that prices are falling much, either in response to the tariffs or the yuan depreciation. Perhaps that is no surprise. Ms Gopinath points out that only around 30% of exchange-rate movements get passed through to prices. Chinese exporters use inputs priced in dollars that become more expensive when the yuan depreciates.
If prices do not fall, Americans can still sidestep the tariffs by switching to alternative suppliers. At first, the Trump administration seemed to be encouraging this approach, singling out products for which there were plenty of available alternatives. If alternatives comparable in price and quality were available, though, companies would presumably already be buying them. And so, as well as the hassle of switching suppliers, buyers will almost certainly face some sort of extra cost. As the tariffs turn from a chiselled list into one bludgeoning all imports from China, that sort of adjustment will be harder to make.
For many companies, switching may be easier said than done. Around half of the products threatened with tariffs are intermediate goods, used by companies to make other stuff. Mary Lovely of Syracuse University points out that the early tariff lists may have been designed this way to protect consumers. Yet given how customised intermediate goods can be, importers may struggle to find a ready alternative.
Supply chains can be complex beasts, requiring each component to be checked and tested. According to the Census Bureau, around a quarter of American imports from China come from a “related party”, which could include an affiliate, a subsidiary or a parent company. Where two companies are embedded in a supply chain or part of the same company, dodging duties may require moving premises.
If the tariffs stick around, then in time trade will adjust. Reports are emerging of companies considering moves to Vietnam. In response to the proposed tariffs on $200bn of Chinese imports, Greg Kirkpatrick, who works for a company making fancy shopping bags, said he was in favour overall. But as orders for the Christmas shopping season have long since been placed, he cannot renegotiate with his Chinese suppliers and is having to tell his customers that their prices will be anywhere from 10% to 25% higher. For now, at least, it seems Americans like him will pay.
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