In July, Uncle Sam collected $30 billion in tariffs. That’s a record tariff monthly haul, and President Donald Trump is trumpeting the number as a sign of success for his trade policy.
But when the federal government gets richer, it means the private sector gets poorer. Every dime of tax collected by the federal government is money a taxpayer no longer has.
So who pays the tariffs?
It depends on how literally you mean that question, on which tariffs you’re talking about, and on how you count. Mostly it depends on market conditions, including the amount of competition and the elasticity of supply and demand.
Literally, who pays?
Literally, tariffs are paid by importers or their customs brokers. Specifically, the “Importer of Record” pays the tariff, or import duty, to Customs and Border Patrol. That Importer of Record could be either the U.S. company that bought the foreign good — Walmart buying a hundred rubber footballs from China, or Maytag importing aluminum to make washing machines — or a “customs broker.” Many importers hire customs brokers to make sure all paperwork is done properly.
This Importer of Record must register with CBP, and must pay the import duty directly to the CBP, which passes it over to the U.S. Treasury.
That’s the legal and technical answer to “who pays the tariff?” But a fuller story is more complicated.
For one thing, the U.S. importer and the foreign exporter might have a contractual agreement that the exporter will cover the cost of U.S. duties — in which case, the exporter might pay the customs broker who in turn pays CBP.
More importantly, who literally pays the tax doesn’t tell us who is getting poorer — because taxes are zero-sum things, and so every tax that enriches the Treasury makes someone poorer.
Economists often study the “economic incidence” of different taxes. Consider payroll taxes that fund Social Security and Medicare. While the employer pays half of the tax, the cost of that employer portion probably falls on the worker, in that it increases the cost to the employer of employing him.
Undoubtedly, some large portion of Trump’s tariffs ultimately fall upon the U.S. consumer. If Walmart has to pay more for a football from China, it will likely charge you more for a football from China. But just who pays how much of the added cost is not a simple question.
Eating tariffs
Because of all the variables and the slightly hidden nature of pricing, it’s hard to directly measure the incidence of tariffs. Economists have spent decades building models, studying what happens to prices and profits under tariffs, and trying to discern cause and effect.
Different market dynamics will result in different distributions of the cost.
If China were the only source of footballs, and if demand for footballs were inelastic (people simply must have their footballs), then the importer could pass on the entirety of the tariff cost to consumers. But if demand is very elastic, or if there are alternative sources of footballs — such as U.S. or Mexican football factories — then, in effect, other folks will end up paying some of the tariff.
President Trump famously told Walmart to “EAT THE TARIFFS,” and to some extent they will. If you mark up the price of Chinese rubber footballs too much, and the price gets too close to U.S.-made leather footballs, then folks will stop buying the rubber Chinese balls. That limits how much Walmart can increase its prices to match the tariffs. Also, the demand for footballs is not elastic. U.S. consumers could keep throwing their old footballs, or just decide to take a walk instead.
So if CBP collects $100,000 in duties on a shipment of footballs, Walmart will only be able to make back some portion of it in higher prices. That means, in effect, the tax is being paid partly by the consumer and partly by Walmart.
Walmart’s CEO said he would “try to work with suppliers to keep prices as low as we can.” That means he will negotiate down the price Walmart pays the Chinese exporter. This could take the form of lower wholesale purchase price (which would reduce tariffs collected) or a contractual agreement by the exporter to pay some of the tariff.
A Chinese exporter might bear the whole cost of a U.S. tariff if the supply-and-demand dynamic is right. For instance, rubber footballs made in Mexico and sold into the U.S. might be exempt from tariffs because of the U.S.-Mexico-Canada trade deal. That means a U.S. football importer has no need to the pay the tariff, because he could always just buy tariff-free Mexican footballs. In such case, a Chinese football exporter, to make a sale, might have to eat the tariff one way or another.
For some tariff defenders, higher consumer prices are a desired outcome, because that makes room for U.S. manufacturing. Making rubber footballs in the U.S. will always be more expensive than making them in China and shipping them here — thanks to higher costs of labor and more regulations. If the tariffs raise the cost of a rubber football by 20%, then it could become profitable for a company to move it’s cheap football factory from Guangdong to Peoria. Or people might start buying the nicer leather footballs already made year, since the price difference will shrink.
Importantly, half of all U.S. imports are intermediate goods, such as aluminum that goes into U.S.-made washing machines. Here, the cost of the tariffs will be born by some combination of the foreign aluminum exporter (and its suppliers), the U.S. manufacturer using the aluminum, the retailer selling the washing machines, and the consumer.
Second-order costs
Many of the expected costs of tariffs are second-order costs. For instance, economists worry that if the U.S. — nearly at full employment — were to shift much of its labor force to making the sort of thing typically made overseas (sneakers, rubber footballs), this would be an inefficient use of our labor force and our factories.
After all, specialization and division of labor are a huge part of why capitalism increases wealth. This concern may not apply given our relatively low labor-force participation rate today — that is, how many adults are not even in the labor market right now. New sneaker-making jobs might draw these adults into the job market.
Another leading argument against tariffs is that they trigger trade wars, which results in tariffs on U.S. manufacturers, among other harms.
Sure enough, many foreign leaders initially responded to Trump’s tariff announcements with promises of retaliation. Battling Trump and sticking it to the Americans were popular rallying cries in Canada and Europe.
But reality has played out differently. World leaders are reacting to Trump’s trade bellicosity by seeking peace. “To avoid worst of Trump tariffs, E.U. accepted a lopsided deal,” the Washington Post headline blared in late July. “Despite feisty rhetoric and vows to stand up to Trump, E.U. leaders largely acquiesced to the U.S. leader’s ever-changing demands.”
Many of the concessions Trump sought and obtained (pledges to buy more U.S. goods) are of questionable value, but the biggest supposed danger of his trade war — high tariffs from other countries — haven’t materialized in the way promised.
This highlights the uncertainty about tariffs.
TRUMP’S TRADE DEALS ARE PAY-TO-PLAY CAPITALISM
Humility is in order
While economists overwhelmingly conclude that high tariffs make everyone poorer, and while all taxes create distortions in the economy, nobody can state with certainty who will pay the costs of Trump’s taxes on foreign goods.
Surely U.S. consumers will pay some significant portion. How much will be eaten by foreign manufacturers, distributors, U.S. manufacturers, and U.S. retailers? There’s no way to know in advance.