Trump’s China tariffs: Paid by US importers, not by China

Contrary to President Trump’s claims that Chinese firms bear the brunt of US tariffs, the reverse is true.

consumer spending - United states
The American Apparel & Footwear Association said Trump's new tariffs would hit US consumers much harder than Chinese manufacturers [File: Mark Makela/Reuters]

With US President Donald Trump‘s announcement on Thursday of tariffs on another $300bn of Chinese imports, nearly all goods from China will be subject to import taxes, and Trump says they generate billions of dollars in revenues for the US Treasury from China.

But that is not how tariffs work. China’s government and companies in China do not pay US tariffs directly. Tariffs are a tax on imported products and are paid by US-registered firms to US customs when goods enter the United States.

Importers often pass the costs of tariffs on to customers-manufacturers and consumers in the US – by raising their prices. US business executives and economists say US consumers foot much of the tariff bill.

That was why, immediately after Trump announced his decision, US retailers blasted the move as “another tax increase on American businesses and consumers,” which they warned would threaten US jobs and raise costs for American families.

The new levies will hit a wide swath of consumer goods from mobile phones and laptop computers to toys and footwear.

Stephen Lamar, executive vice president of the American Apparel & Footwear Association, said the new tariffs would hit US consumers much harder than Chinese manufacturers, who produce 42 percent of apparel and 69 percent of footwear purchased in the US.            

Investors are worried that the increase in retail prices will hit consumer spending, which has underpinned the US economy, and trade uncertainty makes businesses hold back capital spending.

‘Tariff Man’

Trump says the US will be “taxing” China until a trade deal is secured. He has called himself the “Tariff Man,” often repeating that China pays for US tariffs on its goods.

On May 5, he tweeted: “For 10 months, China has been paying Tariffs to the USA”.   

How tariffs work

US 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.

From early 2018 through May 1, Washington has assessed $23.7bn in tariffs, according to data from the CBP.

Total tariff revenue rose by 73 percent year-on-year in the first half of 2019, to a total of $33.9bn, according to US Treasury data.

Impact on Chinese suppliers

Chinese suppliers do shoulder some of the cost of US tariffs in indirect ways. Exporters sometimes, for instance, may offer US importers a discount to help defray the costs of higher US duties and maintain their contracts and market share.

Chinese companies are losing business as US importers are scouting for cheaper, tariff-free sources of the same goods outside China.

Trump and top members of his Cabinet have said that the tariffs are accelerating a move of manufacturing out of China as companies seek to relocate in countries that are not subject to US import tariffs.

US-based importers, meanwhile, are managing the higher tax burden in a number of ways that hurt US companies and customers more than China.

Such strategies include accepting lower profit margins; cutting costs – including wages and jobs for US workers; deferring any potential wage hikes; in addition to passing on tariff costs through higher prices for US consumers or companies.

Most importers use a mix of such tactics to spread higher costs among suppliers and consumers or buyers.

Higher prices all round

Higher duties on imports of Chinese and other products, for example, increased Caterpillar Inc’s production costs by $70m in the last quarter. It expects to pay between $250m and $350m in tariffs this year. In response to higher manufacturing costs, the heavy equipment maker has increased prices.

Walmart Inc, the world’s largest retailer, and department store chain Macy’s Inc have warned of an increase in prices for shoppers due to higher tariffs on goods from China.

A Congressional Research Service report in February found that tariffs imposed by Trump on global washing machine imports had boosted prices by as much as 12 percent compared with January 2018, before tariffs took effect.

Global steel and aluminium import tariffs increased the price of steel products by nearly nine percent last year, pushing up costs for steel users by $5.6bn, according to a study by the Peterson Institute for International Economics.

US companies and consumers paid $3bn a month in additional taxes because of tariffs on Chinese goods and on global metals imports, according to a study by the Federal Reserve Bank of New York, Princeton University, and Columbia University. Companies shouldered an additional $1.4bn in costs related to lost efficiency in 2018, the study found.

Chinese companies’ move

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 the US government collects import taxes on Chinese goods from US importers, the Chinese government takes in taxes on US goods from Chinese importers.

Source: Reuters