Who pays for Trump’s tariffs: US consumers, companies, or China?

While Trump says Beijing is ponying up the cash for import taxes, the economic reality just isn’t that simple.

Trump tractor
To protect its profits from tariffs, Deere & Co has cut costs and increased prices - with an estimated $100m increase in the cost of its raw materials this year [Carlos Barria/Reuters]

In the midst of an ongoing trade war, US President Donald Trump claims that China is paying for the tariffs he imposed on $250bn of Chinese exports to the United States. But that is not exactly how tariffs work. Beijing and companies in China do not pay them directly, as tariffs are a tax on imports. They are quite literally paid by US-registered firms to US Customs and Border Protection (CBP) for the goods imported into the US.

What does Trump have to say about tariffs?

Trump, who has called himself the “tariff man”, has repeatedly claimed that China bears the cost of levies on Chinese imports. “We have billions of dollars coming into our treasury – billions – from China,” he said in January. Beyond China, Trump has also imposed tariffs on global steel and aluminium imports, as well as shipments of washing machines and solar panels.

So does China pay directly for tariffs on its goods?

No. CBP collects the tax on imports from the US companies that import goods from China. Those duties are usually paid within 10 days of their shipments clearing customs.  

Does that mean US companies ultimately bear the cost? 

Not necessarily. The US importers often pass the costs of tariffs on to customers – manufacturers and consumers in the US – by raising their prices. And indeed, US business leaders and economists say American consumers foot much of the bill through rising prices. Even White House economic adviser Larry Kudlow has acknowledged that “both sides will suffer” in a US-China trade war, contradicting the president.

So how big is the tariff bill to date?

The Trump administration has assessed $25.5bn in global tariffs since early 2018, according to data from CBP. Of that total, $18.3bn in tariff revenue was collected on goods coming from China. 

Will the bill get bigger?

It could. Trump this month directed US Trade Representative Robert Lighthizer to launch the process of imposing tariffs on the remaining $300bn of goods from China currently not subject to levies. That includes products ranging from mobile phones to baby pacifiers. This would mean almost all imports from China would be subjected to a 25 percent import tax.

So what does this mean for US companies and consumers?

US-based importers are managing the higher tax burden in a number of ways that end up hurting American companies and customers more than China. Such strategies include accepting lower profit margins; cutting costs, including wages and jobs for US workers; and passing on tariff costs through higher prices for US consumers. Most importers use a mix of such tactics to spread out the costs among suppliers and buyers.

Are US companies doing anything about this?

A growing number of US companies have warned about the negative impact of the tariffs on US consumers. Nike Inc and 172 other footwear companies have urged Trump to remove footwear from the list of imports facing proposed tariffs of an additional 25 percent, warning the move could cost consumers an additional $7bn 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 about companies beyond retailers?

Higher duties on Chinese products – and tariffs on metal imports from elsewhere – have increased production costs for the heavy-duty equipment maker Caterpillar Inc by more than $100m. In response, Caterpillar increased prices for its products. And tractor manufacturer Deere & Co estimates a $100m increase in its raw materials costs this year. Deere has cut costs and increased prices to protect its profits.

Can you give examples of some goods that are more expensive now?

Tariffs have increased washing-machine prices by as much as 12 percent, compared with January 2018. The price of steel products went up by nearly nine percent last year, pushing up costs for steel users by $5.6bn. US companies and consumers have paid $3bn a month in additional taxes because of tariffs on Chinese goods and on aluminium and steel from around the globe.

But don’t Chinese companies also pay?

Chinese suppliers do shoulder some of the cost of US tariffs in indirect ways. Exporters are sometimes forced to offer US importers a discount to help defray the costs of higher US duties. Chinese companies are often afraid of losing business if US importers find tariff-free sources of the same goods other than China.

What has China done in response?

China has retaliated against US tariffs by imposing its own tariffs on imports from the US. Most importers in China are Chinese, so in the same way as the US government collects import taxes on Chinese goods from US importers, the Chinese government takes in taxes on US goods from Chinese importers.

Which US industries are most affected by China’s retaliatory tariffs?

As is the case with tariffs in the US, Chinese firms can seek to pass on the costs to US exporters. People in some US industries have lost business, including soya bean farmers. Chinese buyers have cut billions of dollars of soya bean purchases from the US, because China’s tariffs have made US supplies more expensive than soya beans from competitors.

How does this relate to Huawei?

Independent of tariffs, the Trump administration’s decision to add China’s Huawei – the world’s largest telecoms equipment maker – to a trade blacklist has hit the company hard.

Source: Reuters