- As the trade war between the U.S. and China rages on, a crucial question for investors is: Who actually pays for the elevated tariffs imposed by President Donald Trump's administration?
- Trump has on many occasions said the U.S. is collecting billions of dollars in tariffs from China.
- An expanding body of research shows, however, that the burden of Washington's tariffs has mostly fallen on the U.S., with American importers and consumers having to fork out more money to buy Chinese goods.
- Still, that doesn't mean China has escaped the trade war unscathed. Trump's tariffs may well deal significant damage to the Chinese economy in the longer term.
More than a year after U.S. President Donald Trump fired the first tariff salvo that eventually led to a trade war with China, the debate about who actually bears the burden of those elevated levies has not found a definite conclusion.
Trump has on many occasions said the U.S. is collecting billions of dollars in tariffs from China. In fact, the president reiterated that view over the weekend in a Twitter post, saying that "China is paying a heavy cost in that they will subsidize goods to keep them coming, devalue their currency."
But Trump's claim has been disputed by many American businesses that import Chinese goods, which argue that they're the ones bearing the brunt of those duties.
According to economists, both sides could be right.
When Chinese goods arrive in America, importers — which are generally American but can also be U.S.-registered entities of foreign firms — pay tariffs to customs in order to receive their products. In that sense, American businesses are right that they're the ones footing the bill.
But Trump could be right in that, eventually, it may be the Chinese that pay for the consequences of those tariffs, economists said. That would happen if exporters in China slash the prices they charge their American customers — and therefore earn lower profits — to remain competitive. Effectively, that situation would mean the Chinese companies are paying for the levies going into U.S. government coffers.
More often than not, the "real pain" of tariffs is split between the country that impose those levies and the nation targeted, according to Simon Baptist, global chief economist and managing director in Asia at consultancy The Economist Intelligence Unit.
That means that everyone along the supply chain of a product targeted by Trump's tariffs — from the manufacturer and exporter in China, to importer and consumer in the U.S. — will bear some burden. And economists are increasingly focusing their research on how that burden is shared among those involved in moving goods from China to the U.S.
Trump on Twitter: We are right where we want to be with China. Remember, they broke the deal with us & tried to renegotiate. We will be taking in Tens of Billions of Dollars in Tariffs from China. Buyers of product can make it themselves in the USA (ideal), or buy it from non-Tariffed countries
"How the real pain — along with the smaller amount of gain — is spread around depends on how prices and quantities in the market adjust in response," Baptist wrote in a May note.
He explained that, generally, if China is the only supplier for a product, "more (or all) of the tariff is passed on to US consumers, and the pain is felt by the latter." But in the event that China is merely one of the many countries that sell a product, "prices do not change much and Chinese suppliers lose market share. Then the pain is felt mostly by Chinese producers."
"So, the answer very much varies by product, which is why both sides have been selecting the targets so carefully," Baptist wrote.
An expanding body of research has found that the burden of tariffs has mostly fallen on the U.S.
One of the latest papers published on the topic is by economics researchers from the International Monetary Fund, Harvard University, University of Chicago and the Federal Reserve Bank of Boston. Using price data collected at the U.S. borders and at retailers, the researchers found "nearly complete pass through of tariffs" to America. In other words, little cost is falling on the Chinese manufacturers.
The investigation remains in progress into how much, if at all, retail prices are rising, although some preliminary findings suggest that retailers have absorbed "much of the price impact" and earn lower profit margins from products impacted by Trump's tariffs.
Other studies, though, suggest that consumer prices have gone up in the U.S. as a result of higher levies. One such paper, focusing on washing machines, was published in April by researchers from the Federal Reserve and the University of Chicago. Washers were among the earliest products targeted by the Trump administration, with tariffs from 20% to 50% imposed on nearly all imported large residential washing machines, regardless of their countries of origin.
The impact, according to the study, was a nearly 12% jump in the price of washers — both imported and domestically produced — in the immediate four to eight months after the implementation of the new levies. In addition, the study found that the price of dryers increased by the same magnitude, although they were not subject to elevated tariffs.
William Reinsch, senior advisor and Scholl Chair in international business at think tank Center for Strategic and International Studies, cited that particular study in an April commentary on the impact of tariffs. He explained that prices of both items went up "because most consumers buy washers and dryers together, and manufacturers realized they could get away with increasing the price of both and simply pocket the extra money."
On why the price of washers made in the U.S. also went up even though they're not subject to tariffs, Reinsch said that phenomenon "illustrates the central point of protection — to allow domestic producers to raise prices and make more money so they can recover from the damage done to them by the imports."
Not all products will react to tariff the same way as washing machines due to different demand and supply dynamics at play. But another study published in March looking at the collective impact of all tariffs imposed by the Trump administration in 2018 found that consumers are bearing the full cost.
"We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters. We also find that U.S. producers responded to reduced import competition by raising their prices," wrote researchers from the Federal Reserve Bank of New York, Columbia University and Princeton University
That change in prices has led to an estimated reduction in U.S. real income of $1.4 billion per month by the end of last year, the researchers said.
Despite some studies pointing to American consumers eventually paying the cost of tariffs, the U.S. inflation rate has been relatively stable, according to the Bureau of Labor Statistics' Consumer Price Index.
Mary Daly, president and chief executive of the Federal Reserve Bank of San Francisco, said part of the reason inflation has not ticked up is "firms are still not passing along" the increase in costs to consumers. Instead, they appear to mostly be bearing the brunt of the levies themselves.
Still, that analysis has not been universally confirmed. In fact, some research indicates that Chinese exporters may be the ones paying the toll. European economists Benedikt Zoller-Rydzek and Gabriel Felbermayr argued in a November 2018 paper that "Chinese firms pay approximately 75% of the tariff burden."
In particularly, their analysis found that a 25 percentage point increase in tariffs results in an average 4.5% rise in the price that U.S. consumers pay for Chinese products, but it slashes the price that producers in China charge by 20.5%.
How all parties along the supply chain are affected forms just one part of the overall economic cost of tariffs. Economists also take into account how the changes in prices and sales volume affect the behavior of consumers and companies in the long run. That's ultimately more important for economic growth.
Generally, economists predicted that the Chinese economy — instead of the U.S. — will experience a larger hit from Trump's tariffs. That's partly because the American economy is on better footing, and over the longer term, China may have more to lose because of its larger reliance on exports.
Research firm Oxford Economics said in a May report that, if the U.S. and China impose elevated tariffs on all goods they trade, the American economy in 2020 is estimated to grow by 0.5 percentage points less than a no-tariff scenario. Meanwhile, China's economic setback is expected to be 1.3 percentage points, the report said.
One way that China has felt the pinch is through a loss of demand for its products, Oxford Economics said. The company explained that, based on American trade data, U.S. imports of Chinese goods subject to 25% tariffs are estimated to have fallen by 50%.
"The 'cost' of tariffs is also about their impact on economic activity. If the intention was to hurt Chinese exporters and so force concessions from the Chinese authorities, then the pain is becoming visible," Adam Slater, lead economist at Oxford Economics, wrote in a May report.
But higher prices paid by U.S. consumers and elevated costs faced by American companies would hurt the American economy too, said Stefan Legge, an economics researcher and lecturer at the University of St. Gallen in Switzerland.
"Tariffs are nothing but taxes and as such hurt the US economy," Legge told CNBC.
With both countries in the tariff fight feeling the pain in some ways, the question is whether the Trump administration considers the costs to American companies and consumers a price worth paying in pursuit of whatever it wants from China.
From a pure economic point of view, "tariffs are almost never a preferred policy choice to achieve an objective" because of the many potential negative side effects, said Legge. But the U.S.-China trade war goes beyond economic considerations, so Washington may view the negative impact of tariffs as "a necessary sacrifice" to come out politically victorious, he added.
White House economic advisor Larry Kudlow admitted as much. In a contradiction to Trump, Kudlow acknowledged that both the U.S. and China "will suffer" in the trade war, but he argued that it's a risk "we should and can take without damaging our economy in any appreciable way."