August 13, 2019I am repeatedly asked who is really paying the tariffs. That question has been asked and answered so many times by so many people you would think that by now everybody in the country would know the answer. There is, however, at least one person who clearly does not know the answer—President Trump. So, I am going to answer it again. Those of you who already know the answer—which is most of you—can skip the next three paragraphs.
The answer to who is paying the tariffs at the front line is: the importer—the person bringing the goods into the country. What happens after that depends on the importer, his customers, and the nature of the product. He might be a retailer who will move the goods directly to stores for sale. He might be a classic “middleman” who imports on behalf of someone else and then transfers the goods to the end user. Or there might be a different arrangement. In all of these cases, there can be differences in who ends up paying. For some items, the person selling them domestically might simply raise the price the amount of the tariff and hold himself harmless. Alternatively, he might raise prices to cover only part of the tariff in order to remain competitive and “eat” the rest of it in the form of lower profits. In a highly competitive sector, he may be forced to eat the whole thing if he wants to maintain market share. Similarly, a manufacturer importing parts and components can include the tariff in the increased price of his end product, or he can choose to eat all or part of it in order to keep prices down.
In all those cases, it is Americans paying the bill—either consumers in the form of higher prices or retailers/manufacturers in the form of lower profits. There is one situation where the foreign exporter might pay. That is where the U.S. importer or end user has sufficient market power to convince the foreign exporter or manufacturer to lower prices and eat all or part of the tariff in order to maintain a good relationship with a major buyer of goods or simply to prevent the customer from changing suppliers to one in a country not affected by tariffs. The latter is particularly likely in sectors where there are many alternative producers all over the world.
Footnote: Economists will also point out that demand elasticities play a role here. If demand for a product is highly elastic, then higher prices will have a dampening effect on demand and fewer products will be sold. In that case, both foreign manufacturer and U.S. retailer take a hit. Analytically, this is very much a case-by-case situation. Most research suggests the most common situation is the first one—U.S. consumers pay the cost.
The second of today’s myths is that China is manipulating its currency. The president has periodically asserted that, and last week essentially pushed the Treasury Department into declaring China a currency manipulator. As with the assertion that China is paying the tariffs, this is simply false, at least in the way he meant it. The relevant U.S. statute has three criteria for determining manipulation—an excessive current account surplus, an excessive bilateral trade surplus with the United States, and evidence of intervention in the market in a consistent direction over a period of time. China currently meets only one of those—the bilateral surplus—and Treasury has since the early 1990s, and most recently this spring, declined to name China a currency manipulator. Piling on, the International Monetary Fund (IMF) on Friday issued its annual analysis of China’s economic policies and concluded the currency was “broadly stable” over the past year. (It declined 2.5 percent against a basket of currencies.)
What is true, as the IMF notes, is that China has been taking steps to prop up the value of the renminbi. In that sense, it is manipulating its currency, but in our favor. It appears to have stopped doing that a week ago, allowing market forces to kick in and push the renminbi down. So, in the Alice in Wonderland world of the administration, where down is up and up is down, the fact that China stopped propping up the renminbi is apparently proof it was manipulating it downward.
Such a declaration is largely symbolic—it requires the administration to spend a year discussing the issue with China. More worrisome is the president’s repeated calls for the Federal Reserve to push down the value of the dollar in response. That could kick off a cycle of competitive devaluations, which we have not seen since the 1930s when countries made the Depression worse by trying to gain advantage over their trading partners. Hopefully, the Fed will remember that it is an independent agency.
So, two myths. My naïve hope is someday we will get back to a point where facts actually prevail, and we make policy on the basis of reality rather than myth.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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