Home Economics It Ain't China That Pays The American Tariffs

It Ain’t China That Pays The American Tariffs

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Donald Trump expended much effort attempting to insist that it was China paying all those import tariffs that he imposed upon imports into the US. Everyone else kept shouting that it was Americans who paid import tariffs because they were and are taxes upon the things that Americans buy.

Everyone else was right.

Now, it is theoretically possible that tariffs fall upon producers. It could be that imports fall by a lot as a result of tariffs and therefore it’s those who make the things that get stiffed. Lost profit through not making sales and all that. Or even price cutting to the bone to keep the sales under that new layer of taxation.

The thing is this is an empirical question. What’s the elasticity of demand with respect to price for the goods under discussion? Depends upon the goods:

American consumers are bearing nearly 93 percent of the costs of the tariffs applied to Chinese goods, according to a new report from Moody’s Investors Service. Just 7.6 percent of the added costs of the tariffs are being absorbed by China, the investment firm found.

And it gets worse. When China responded to Trump’s tariffs by slapping new tariffs on many American goods, American firms paid a significant price. That’s because “U.S. exporters, unlike China’s exporters, lowered by roughly 50 percent the prices of goods affected by foreign retaliatory tariffs, carrying a much higher cost burden than foreign importers of goods under U.S. tariffs,” writes Dima Cvetkova, an associate analyst at Moody’s and author of the report.

Isn’t that fun? The elastgicity of demand with respect to price is greater fror US exports to China than it is for Chinese exports to hte US. Therefore, even if this idea that producers can carry the costs of tariffs is true we find out that the US still comes off worst in a trade war with China.

So, us classical liberals are right again and Peter Navarro is an economic poopyhead.

And it gets worse again. Because as is usual in these sorts of calculations they’re only looking at the prices of goods which are subject to the tariffs. They’re not looking at the domestic production consumed in place of tariffed goods.

Think on it for a moment. Say there’s a tariff on Chinese steel. OK, so Chinese steel costs more for Americans and we can go work out how much by. But this also allows – in fact is the point of the exercise – all American steel makers to raise their prices because that Chinese competition is knee capped. American consumers now lose out by that higher cost of domestic steel as well.

And, yeah, Navarro, poopyhead, well, we did say so right at the start, didn’t we?

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