George Rebane
President Trump’s current tariff wars are definitely having a mixed impact on economies in the US and around the world. His claim that ‘China is now paying us billions in tariffs’ is patently false. But most people still think that tariffs on Chinese imports now consist of the imported goods plus a check for the tariff amount written by someone in China. And that a 25% tariff on Chinese imports will increase their price for such goods by 25%. Not so.
Tariffs on imported goods are paid for by the US registered importers to our Customs and Border Protection (CBP) agency within 10 days of the goods landing in the US, which monies go into the Treasury's general fund of tax collections. That, of course, increases the cost of doing business since the importer must now increase his, usually financed, operating capital by the amount of the tariff, thereby increasing both the direct cost of what he buys, and also adding the cost of financing the tariff amount. (more here)
To see how the tariff impacts us on the receiving end, consider the rule-of-thumb breakdown of end-user price. For most things the ‘one-thirds rule’ applies – 1/3 to the manufacturer, 1/3 to distribution, 1/3 to the retailer (end-seller). That means that the distributor (distribution channel) charges the end-seller twice its cost(s) for the item, and the end-seller then adds 50% of his cost to arrive at the price the end-user must pay.
So, let’s look at a pair of athletic shoes for which the consumer pays a pre-tariff $100. The Chinese manufacturer sells these out the door for, say, $32. The importer (distributor) must pay, say, a 25% tariff on the goods, or $8 to the CBP for a total cost of $40 for the shoes at the port of entry. Now how much of that additional $8 cost he passes on to the retailer depends on what kind of a hit he’s willing to take on his profit margin. Say, he’s willing to swallow half the increased cost, so he sells the shoes to the retailer for 2*($32 + 0.5*$8) = $72. If the retailer now followed the one-third rule, then the price for the end-user consumer would be 1.5*$72 = $108, or an 8% price increase. Being sensitive to the price-demand curve (you sell less of what costs more), the retailer may decide to swallow, say, 25% of his increased cost, or 0.25*($72 – $64) = $2. This brings the consumer price of the athletic shoes to $106 or a 6% increase to the American end-user that was caused by imposition of a 25% tariff on such imports.
You can, of course, play this game with different numbers, for example starting with the Chinese manufacturer also discounting his out-the-door price of $32 to keep his shoe sales volume up. Anyway, this should give us all an idea how and where tariff charges impact everyone in the process of getting imported stuff into the hands of end-users. (Those wanting to play with these numbers can now see the effect on end prices by also considering the slightly more complex intermediate ‘end pricing’ of imported components ordered by US manufacturers making goods for US and foreign markets.) And when all is said and done, everyone in the described chain will hold their breath to see how much the end-user will balk at paying the increased price and thereby lower the sales volume for the shoes, which effect will ripple up the chain impacting all kinds of decisions about what to pay, what to charge, and from where to buy.
In sum, the penalty that China (or any tariff assessed country) pays is that 1) they will sell less of the stuff to end users who have to pay a higher price, and/or 2) manufacturers and distributors on the receiving end will inevitably try to obtain the same stuff from countries that are not tariffed so as to regain their profit margins while lowering end user prices. When, like China, you have entire industrial sectors geared to make goods for the single largest market in the world, tariffs on the receiving end do impose many forms monetary and financial penalties at the source end. But make no mistake, the pain of tariffs is felt by all sides, and Trump needs to make that clear instead of spewing only the ‘China pays’ bullshit to the American electorate. (Don’t mistake this screed as an assessment of the strategic wisdom cum effectiveness of today’s tariff trade wars; that is another discussion altogether.)
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