That will offset some of the after-tax price of Chinese-made goods in the US. A substantial decline in Chinese exports to the US will drive down the value of the Chinese currency. There may be other fiscal effects for the US, however. Worldwide, tariffs represent only about 3.5 percent of government revenue.
In 2016, import duties made up only about 1 percent of tax collections. After World War II, tariffs become a tiny source of US tax revenue. Increasingly, revenue was collected from the modern income tax that had been enacted just a few years earlier. But that share fell as the US began exporting many of its own goods overseas and began to reach agreements with importing countries to reduce their tariffs on American products.īy 1915, less than one-third of federal revenue came from customs duties. Before the civil war, they represented nearly 90 percent of federal revenue. Once, tariffs were an important source of federal taxes. Unfortunately, the tax on consumers in the form of those higher prices is less likely to disappear. Worse, the new revenue is likely to be temporary as US importers and sellers find suppliers not subject to the tariff. But even if it isn’t, keep in mind that the government expects to collect $2.4 trillion in tax revenue in 2018-making $22 billion loose change in the fiscal sofa cushions. The president says the US has collected about $22 billion since his first round of tariffs earlier this year. Import taxes are a trivial share of federal revenue and, even with Trump’s new tariffs, they will remain insignificant. Will Trump’s new tariffs generate a big boost in federal revenue? Chinese exports to the US will fall but most likely be replaced by imports from producers of competing products in other countries. In the case of Trump’s tariffs, US prices will rise but not by much and US demand will decline but not by much. Thus, not only will the price of Chinese TVs rise, but so will the price of Mexican TVs and US-made TVs ( yes, there still are a few). In the case of Trump’s tariffs on China, that means US consumers will pay somewhat higher prices. And less competition will result in higher prices, not just for those goods subject to the tariff but for competing goods that are not-such as those made domestically. But in the longer term, the decline in competition from foreign products makes domestic firms less efficient. In the short run, higher prices for imported goods will reduce consumption of those goods. After all, tariffs are hardly new and economists since Adam Smith have been writing about their problems for centuries. There is lots of economic theory about the effect of tariffs on consumption and prices. That’s what the president was bragging about. Still, demand for imported goods subject to the tax won’t go to zero right away-so the government will collect some revenue from the import tax. Or, the firm may switch to a non-Chinese supplier and, in effect, nobody will pay the tariff. In that case, some of the tax may be paid by the firm’s shareholders in the form of lower profits or by its workers in the form of lower compensation. But the firms selling those TVs eventually will face competition from companies that sell lower-cost TVs made in a third country that is not subject to the import tax.
Thus, the price of Chinese TVs sold in the US may rise rapidly. OK, so the importer remits the tariff to its nation’s customs service, but who really pays the tax on imported goods? The answer, I am sorry to say is, it depends.Ī business will, if it can, pass its higher after-tax costs on to consumers. Rather, an importer or supplier for a Canadian supermarket pays the duty on Wisconsin cheese that lands in the grocer’s dairy counter (though I suspect few Canadian retailers are selling much US cheese these days, given the recent unpleasantness between the two countries). The Chinese government pays nothing, just as the US government pays no tax to Canada for that nation’s tariffs on imported dairy products. Thus, if the US imposes a tariff on Chinese televisions, the duty is paid to the US Customs and Border Protection Service at the border by a US broker representing a US importer, say, Costco. Despite what the President says, it is almost always paid directly by the importer (usually a domestic firm), and never by the exporting country. Pointing to earlier import duties he imposed, Trump bragged that “China is paying us billions of dollars in tariffs.” Treasury, he added, is collecting “tremendous amounts of money, which is great for our country.”Ī tariff is a tax on imported goods. But he showed a troubling lack of understanding about how the levies work. Earlier this month, President Trump escalated his trade war with China by announcing 10 percent tariffs on an additional $200 billion in Chinese imports-which took effect yesterday.
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