There are so many news "reports" and opinion pieces floating through the media today with regard to tariffs, it is worth taking a moment to refresh ourselves as to just what tariffs are and how they actually work.
1. A tariff is a tax collected by the government on an imported good. For example, let's say that the US imposes a 25% tariff on steel imported into the USA from China. A steel beam costing $100 being delivered from China into the port of Long Beach in California would generate a $25 tariff.
2. The tariff is paid by the person importing the item into the USA. Using our steel beam example, then, the tariff would be paid by either the company selling the steel to the US buyer or by that American buyer. Which one would pay is determined by the contract between the seller and the buyer. Absent a contractual provision, the tariff would likely be paid by whoever it is that owns the steel at the time of importation.
When President Trump says that China will pay the tariffs, that is not completely accurate. Rather, it is a shorthand way for Trump to say that most of the tariffs will be paid by Chinese companies (again something that may or may not be true.)
When opponents of the President say that the American consumer pays the tariff, that too is not accurate. Essentially no imports come from China directly to the consumer, so there is little chance that any of the tariffs will be paid by the consumers.
Nevertheless, as discussed below, very often some or all of the cost of the tariff gets passed on to the final consumer. In other words, we cannot be sure exactly who will pay the tariffs.
3. The point of tariffs is to make the goods being imported into the USA more expensive than they were previously and more expensive than goods from other countries or than those of domestic manufacture. Using our steel beam example, it sells for $100 before the tariffs. Let's say that a comparable beam made in a mill in Pennsylvania sells for $120. After the tariff, the beam from China costs $125 while the one from Pennsylvania still costs $120. Suddenly, the domestic steel beam is a better bargain than the one imported from China.
4. When the tariff is first imposed, there may be some cost passed on to the American end user. Again using our steel beam example, the builder who ordered it so it could be used to construct an office tower will likely have to pay $125 rather than $100 for that Chinese beam. That transaction, however, will be completed and it will be time to purchase the next steel beams needed for construction. At that point, a beam from China will cost $125, but a domestic beam from Pennsylvania will cost only $120. The customer will buy steel from the domestic mill. Chinese factories will lose sales while American factories will gain some.
5. There are many products where there is currently no domestic competition for Chinese products. There are, however, other countries that can produce materials inexpensively and beat out China. For example, production of clothing now made in China might go to Vietnam or India after the prices of Chines products rise 25% due to the tariffs. Again, these sorts of tariffs put a heavy burden on Chinese companies due to the substantially higher price they have to charge to cover the cost of the tax.
6. After a period of adjustment of a few months, the net effect of the tariffs on Chinese goods will be to reduce imports into the USA from China. These imports will be replaced by either domestic production or production from low cost countries that compete with China. The tariff is a big blow to China and its business community.
7. If there are industries for which the world supply is tight and demand is heavy, the tariffs will just move the shipping destinations around without changing much else. For example, when China puts a tariff on American farm products, it just disrupts and delays sales; it doesn't really prevent them. China's tariff on soybeans, for example, could dissuade Chinese companies from buying Iowa soybeans and choosing instead soybeans grown in Brazil. Nevertheless, because of the worldwide rising demand for soybeans, Iowa famers may sell instead to buyers in Germany or Spain. It will take a bit of time for buyers to find sellers and vice versa, but ultimately the market will smoothe out.
8. Tariffs are not the only weapons that a country has in its arsenal of trade "weapons". China might take other steps besides reciprocal tariffs. Still, because of the current market conditions, a battle involving only tariffs seems to greatly favor the USA.
1. A tariff is a tax collected by the government on an imported good. For example, let's say that the US imposes a 25% tariff on steel imported into the USA from China. A steel beam costing $100 being delivered from China into the port of Long Beach in California would generate a $25 tariff.
2. The tariff is paid by the person importing the item into the USA. Using our steel beam example, then, the tariff would be paid by either the company selling the steel to the US buyer or by that American buyer. Which one would pay is determined by the contract between the seller and the buyer. Absent a contractual provision, the tariff would likely be paid by whoever it is that owns the steel at the time of importation.
When President Trump says that China will pay the tariffs, that is not completely accurate. Rather, it is a shorthand way for Trump to say that most of the tariffs will be paid by Chinese companies (again something that may or may not be true.)
When opponents of the President say that the American consumer pays the tariff, that too is not accurate. Essentially no imports come from China directly to the consumer, so there is little chance that any of the tariffs will be paid by the consumers.
Nevertheless, as discussed below, very often some or all of the cost of the tariff gets passed on to the final consumer. In other words, we cannot be sure exactly who will pay the tariffs.
3. The point of tariffs is to make the goods being imported into the USA more expensive than they were previously and more expensive than goods from other countries or than those of domestic manufacture. Using our steel beam example, it sells for $100 before the tariffs. Let's say that a comparable beam made in a mill in Pennsylvania sells for $120. After the tariff, the beam from China costs $125 while the one from Pennsylvania still costs $120. Suddenly, the domestic steel beam is a better bargain than the one imported from China.
4. When the tariff is first imposed, there may be some cost passed on to the American end user. Again using our steel beam example, the builder who ordered it so it could be used to construct an office tower will likely have to pay $125 rather than $100 for that Chinese beam. That transaction, however, will be completed and it will be time to purchase the next steel beams needed for construction. At that point, a beam from China will cost $125, but a domestic beam from Pennsylvania will cost only $120. The customer will buy steel from the domestic mill. Chinese factories will lose sales while American factories will gain some.
5. There are many products where there is currently no domestic competition for Chinese products. There are, however, other countries that can produce materials inexpensively and beat out China. For example, production of clothing now made in China might go to Vietnam or India after the prices of Chines products rise 25% due to the tariffs. Again, these sorts of tariffs put a heavy burden on Chinese companies due to the substantially higher price they have to charge to cover the cost of the tax.
6. After a period of adjustment of a few months, the net effect of the tariffs on Chinese goods will be to reduce imports into the USA from China. These imports will be replaced by either domestic production or production from low cost countries that compete with China. The tariff is a big blow to China and its business community.
7. If there are industries for which the world supply is tight and demand is heavy, the tariffs will just move the shipping destinations around without changing much else. For example, when China puts a tariff on American farm products, it just disrupts and delays sales; it doesn't really prevent them. China's tariff on soybeans, for example, could dissuade Chinese companies from buying Iowa soybeans and choosing instead soybeans grown in Brazil. Nevertheless, because of the worldwide rising demand for soybeans, Iowa famers may sell instead to buyers in Germany or Spain. It will take a bit of time for buyers to find sellers and vice versa, but ultimately the market will smoothe out.
8. Tariffs are not the only weapons that a country has in its arsenal of trade "weapons". China might take other steps besides reciprocal tariffs. Still, because of the current market conditions, a battle involving only tariffs seems to greatly favor the USA.
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