The Tariff Game: Who Pays?
April 29, 2019
One of the issues that has come up periodically since the United States made tariffs a common tactic is who pays them. There are two parts to that: who pays the tariffs, and who pays for the consequences of the tariffs. Let’s look at those one by one.
The president has frequently asserted that foreigners, particularly the Chinese, are paying the tariffs and bragged about the amount of money being brought in. This is not true. In the first instance, when goods enter the country, tariffs are paid by the importer of record, who is generally a U.S. person. What happens then is more complicated. The importer might choose to pass on the entire amount of the tariff to his U.S. customers, who might be companies buying parts and components or just ordinary citizens buying a consumer product made abroad. Alternatively, if the importer is concerned about the products being less competitive because of a higher price, he might choose to “eat” all or part of the tariff and sell the goods at either the earlier pre-tariff price or some price between that and the full-tariff price. In either case, it is Americans who are paying the increased cost.
It is also possible that the foreign exporter, in order to maintain market share, will lower the price of his goods, which would make the additional amount of the tariff, which is a percentage of his price, somewhat smaller. In that case, the president is right, but that is by far the lesser case. The question of who pays for the consequences of the tariffs is also interesting, and there are a couple of recent studies that provide some guidance. One , by the University of Chicago and the Federal Reserve, looked at the president’s 2018 tariffs on washing machines, a result of the domestic industry’s section 201 “safeguard” case. That study concluded that while the tariffs are giving the U.S. Treasury an additional $82.2 million, the price increases associated with the tariffs cost U.S. consumers $1.5 billion per year. That works out to an increase of $86 for each washing machine and, interestingly, an increase of $92 for each dryer.
That latter statistic provides a useful lesson in protection. The price of dryers went up even though there were no additional tariffs on them. Why? Because most consumers buy washers and dryers together, and manufacturers realized they could get away with increasing the price of both and simply pocket the extra money. Note also that these numbers refer to all washers and dryers, not just imports, which illustrates the central point of protection—to allow domestic producers to raise prices and make more money so they can recover from the damage done to them by the imports. The point of the exercise, after all, is ostensibly to help the U.S. producers, so if their prices don’t go up in tandem with the prices of imports, they are not benefitting.
When tariffs are imposed, the rationale is almost always to create or save jobs, and it is logical to conclude that if U.S. manufacturers have a protected market and higher prices, they might hire more people. That happened in the washing machine case (and also the steel and aluminum cases), but digging a bit deeper produces an interesting statistic. The U.S. washing machine manufacturers added about 1,800 jobs, but if you divide the consumer cost of the tariffs ($1.5 billion) by that number, it works out to $815,000 per job . Is each one of those jobs worth that much? I imagine those who got them would say “yes,” but since the usual cost of government-created jobs is around $30,000 each, it would have been more productive for the administration to raise taxes by $1.5 billion, spend all of it on job creation, and come up with 50,000 new jobs instead of 1,800 jobs.
Another study, this one on solar panels, also shows that the outcome of trade protection is not always what one expects. Solar panels also benefitted from tariffs because of the same kind of section 201 case; they were 30 percent in 2018 and this year will decline to 25 percent and by 2021 will be 15 percent. The data suggests that the tariffs so far added about 10 percent to the cost of solar installations, which, in turn, has contributed to the reduction in the number of those installations. In addition, according to the Energy Futures Initiative, solar manufacturing jobs declined from 51,410 in 2017 to 46,539 in 2018, the opposite of what one would expect. It appears that declines in demand, in part related to the tariffs, had something to do with that, along with the fact that new facilities are less labor-intensive than older ones.
That is a common story in manufacturing—improvements in productivity caused by technological improvements have had more to do with job loss than other factors, including imports. I suppose it is more emotionally satisfying to say the foreigners stole my job than to say a better machine replaced me, and sometimes that is true, but not always. Being able to tell the difference and have an honest conversation about both would lead to a healthier debate about trade policy, but as long as the president is arguing that tariffs bring in enormous amounts of money and create huge numbers of jobs, that is not likely to happen.
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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