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.
U.S. business executives and economists say U.S. consumers foot much of the bill through rising prices.
White House economic adviser Larry Kudlow has acknowledged that “both sides will suffer on this,” contradicting the president.
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 per cent import tax.
Almost all imports from China could be subject to a 25 per cent import tax
A growing number of U.S. companies has warned about the negative impact of the tariffs on U.S. consumers.
Nike Inc. and 172 other footwear companies have urged Trump to remove footwear from a list of imports facing a proposed extra 25 per cent tariff, warning the move could cost consumers an additional US$7 billion a year.
Walmart Inc., the world’s largest retailer, and department store chain Macy’s Inc. have warned that prices for shoppers will rise due to higher tariffs on goods from China.
What the “Tariff Man” says
Trump, who has called himself the Tariff Man, has often repeated that China pays for U.S. tariffs on its goods.
“We have billions of dollars coming into our Treasury — billions — from China. We never had 10 cents coming into our Treasury; now we have billions coming in,” he said on Jan. 24.
On May 5, he tweeted: “For 10 months, China has been paying Tariffs to the USA.”
As well as imposing tariffs on Chinese goods, Trump has also imposed a tax on global steel and aluminum imports and shipments of washing machines and solar panels.
President Trump has also imposed a tax on global steel and aluminum imports and shipments of washing machines and solar panels.
How tariffs really work
U.S. Customs and Border Protection (CBP) collects the tax on imports. The agency typically requires importers to pay duties within 10 days of their shipments clearing customs.
Through May 1, Washington has assessed US$23.7 billion in tariffs since early 2018, according to data from the CBP.
Total tariff revenue — including levies that pre-dated Trump – shot up 89 per cent 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.
Every item imported into the United States legally has a customs code. Importers are expected to check the tariffs and other taxes and duties due on the goods they bring in, calculate what they owe and pay it.
U.S. Customs reviews payments and sends importers a fresh bill if it detects underpayment.
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.
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.
And outside of tariffs, the Trump administration’s decision to add China’s Huawei, the world’s largest telecom equipment maker, to a trade blacklist, has hit that company hard.
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.
John Deere & Co. has had to cut costs and increase prices to make up for higher material costs.
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. In response, the heavy-duty equipment maker increased prices for its products.
Tractor manufacturer Deere & Co estimates a US$100 million increase in its raw materials costs this year because of Trump’s tariffs on Chinese imports. Deere has cut costs and increased prices to protect its profits.
A Congressional Research Service report in February found that the tariffs boosted washing machine prices by as much as 12 per cent from January 2018, before tariffs took effect.
Steel and aluminum tariffs increased the price of steel products by nearly nine per cent last year, pushing up costs for steel users by US$5.6 billion, according to a study by the Peterson Institute for International Economics.
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.
Most importers in China are Chinese. So in the same way the U.S. government collects import taxes on Chinese goods from U.S. importers, the Chinese government takes in taxes on U.S. goods from Chinese importers.
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.
