Reports show who really pays for tariffs

businesses, consumers pay costs of tariffs

Where one tariff threat subsides, another pops up in its place.

Almost immediately after announcing the suspension of proposed tariffs on Mexican goods, President Donald Trump leveled a new tariff threat against China. The President said he would impose 25% tariffs on another $300 billion worth of Chinese imports if President Xi Jinping doesn’t meet with him during the upcoming G20 summit in Japan.

Beijing has yet to confirm any planned discussions between the two leaders at the summit.

While President Trump said he doesn’t have a deadline for the new tariffs, he previously indicated that he would make a decision on the matter after the G20 summit.

The US government has already placed 25% tariffs on $250 billion worth of Chinese goods.

The President has repeatedly stated that China pays for tariffs on its imports, and is “filling US coffers” by $100 billion per year. It’s true that duties collected by the US Customs and Border Protection go to the US Treasury, but that’s only part of the tariff equation. Recent reports paint a clear picture of who is largely paying the price of the tariffs: American businesses and consumers.

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The “losers from trade tensions”

According to a report from the International Monetary Fund (IMF), “tariff revenue collected has been borne almost entirely by US importers.”

Another report from economists at the IMF, Harvard University, University of Chicago, and the Federal Reserve Bank of Boston found that a “nearly complete passthrough of tariffs to the total price paid by importers suggests the tariff incidence has fallen largely on the US.”

That means importers in the US have been left with two options: pass the costs onto consumers or absorb the increase and make less profit.

“Consumers in the US and China are unequivocally the losers from trade tensions,” the IMF said in a blog post.

In 2018, US goods and services trade with China totaled about $737.1 billion, according to the Office of the United States Trade Representative. Exports accounted for $179.3 billion, and imports were $557.9 billion. China was the US’s largest supplier of imported goods in 2018.

The IMF noted that while the direct effect on inflation may be small, the situation could have “broader effects through an increase in the prices of domestic competitors.” What’s more, additional tariffs would not only make many goods less affordable in general but would harm low-income households disproportionately.

Research done by Trade Partnership Worldwide, an international trade and economic consulting firm, found that 25% tariffs on an additional $300 billion in Chinese imports, on top of levies already in place, would increase costs by more than $2,000 per year for the average American family of four. It also noted that the value of the US gross domestic product (GDP) would drop by 1%.

Citing the Trade Partnership data, 661 American companies and associations recently signed a letter urging President Trump to resolve the trade dispute with China to avoid further hurting US businesses and consumers.

“We remain concerned about the escalation of tit-for-tat tariffs. We know firsthand that the additional tariffs will have a significant, negative and long-term impact on American businesses, farmers, families and the U.S. economy.”

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Far-reaching implications

The repercussions of ongoing trade tensions aren’t isolated to just the US and China.

In a blog post, the IMF’s managing director, Christine Lagarde, said US-China tariffs would cut global economic output by 0.5% in 2020. That would mean about $455 billion would disappear from the global GDP – a loss that is larger than the size of South Africa’s economy.

And the majority of that decline will reportedly stem from business confidence implications and negative market sentiment.

According to economists at Bloomberg, the hit to the global GDP will reach $600 billion in 2021, which they project to be the year of “peak impact” from the US-China tariffs.

There’s no question that such a plunge would have broad and long-lasting implications.

“Failure to resolve trade differences and further escalation in other areas, such as the auto industry, which would cover several countries, could further dent business and financial market sentiment, negatively impact emerging market bond spreads and currencies, and slow investment and trade,” explained the IMF in a blog post.

“In addition, higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare.”

The tariffs might be intended to persuade China to change its trade policies, but at the moment they are doing little more than serving as another tax for American businesses and consumers while creating economic distortions domestically and globally.

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* This blog provides general information and discussion about global business payments and related subjects. The content provided in this blog ("Content”), should not be construed as and is not intended to constitute financial, legal or tax advice. You should seek the advice of professionals prior to acting upon any information contained in the Content. All Content is provided strictly “as is” and we make no warranty or representation of any kind regarding the Content.