U.S. President Donald Trump says China pays the tariffs he has imposed on US$250 billion of Chinese exports to the United States.

But that is not how tariffs work. China’s government and companies in China do not pay tariffs directly. Tariffs are a tax on imports. They are paid by U.S.-registered firms to U.S. customs for the goods they import into the United States. 

Importers often pass the costs of tariffs on to customers — manufacturers and consumers in the United States — by raising their prices.

The tariff bill is set to rise further. Trump this month directed U.S. Trade Representative Robert Lighthizer to launch the process of imposing tariffs on the remaining US$300 billion of goods from China. That includes products ranging from cellphones to baby pacifiers. That would mean almost all imports from China would be subject to a 25% import tax.

A growing number of U.S. companies has warned about the negative impact of the tariffs on U.S. consumers .Nike, Walmart, Macy’s, and many other retailers have all issued warnings about the increased costs for consumers. 

How tariffs really work
U.S. Customs and Border Protection (CBP) collects the tax on imports. Through May 1, Washington has assessed US$23.7 billion in tariffs since early 2018, according to data from the CBP.

Importers also have to post payment guarantees, or import bonds, with customs. The costs of these bonds have risen with tariffs, an additional burden on U.S.-based firms importing goods from China.

Total tariff revenue — including levies that pre-dated Trump – shot up 89% in the first half of the current fiscal year that started Oct. 1, to a total of US$34.7 billion, according to U.S. Treasury data.

Do Chinese suppliers bear the costs of U.S. tariffs?
Chinese suppliers do shoulder some of the cost of U.S. tariffs in indirect ways. Exporters sometimes, for instance, are forced to offer U.S. importers a discount to help defray the costs of higher U.S. duties. Chinese companies might also lose business if U.S. importers find another tariff-free source of the same goods outside China.

But U.S.-based importers are managing the higher tax burden in a number of ways that hurt U.S. companies and customers more than China. Such strategies include accepting lower profit margins; cutting costs — including wages and jobs for U.S. workers; deferring any potential wage hikes, as well as passing on tariff costs through higher prices for U.S. consumers or companies. Most importers use a mix of such tactics to spread the higher costs among suppliers and consumers or buyers.

Higher prices for tractors, washing machines
Higher duties on imports of metals and Chinese products, for example, increased Caterpillar’s production costs by more than US$100 million last year and Deere & Co estimates a US$100 million increase in raw materials costs. In response, the heavy-duty equipment makers increased prices for their products.

A Congressional Research Service report in February found that the tariffs boosted washing machine prices by as much as 12% from January 2018, before tariffs took effect.

U.S. companies and consumers paid US$3 billion a month in additional taxes because of tariffs on Chinese goods and on aluminum and steel from around the globe, according to a study by the Federal Reserve Bank of New York, Princeton University and Columbia University. Companies shouldered an additional US$1.4 billion in costs related to lost efficiency in 2018, the study found.

What do companies in China pay?
China has retaliated against U.S. tariffs by imposing its own tariffs on imports from the United States. As with tariffs in the United States, Chinese firms can seek to pass on the costs to U.S. exporters. Some U.S. interests have lost business, such as U.S. soy farmers. Chinese buyers have cut billions of dollars of soybean purchases from the United States because China’s tariffs have made U.S. supplies more expensive than beans from competitors such as Brazil.

Source: Financial Post