Now that President Trump has climbed down from his high tariff horse – but only for 90 days – maybe – who knows? – and American stock markets have, more or less, restored the capital asset value that was lost last week, we should focus on understanding an important fact: who actually pays tariffs?
From his perspective, given his speeches and social media comments, it appears that President Trump loosely thinks that foreigners pay our tariffs, so if he imposes tariffs, the U.S. will suck in money from foreigners, many of whom are, apparently to him, benighted in one way or another.
But tariffs are a form of domestic taxation – Americans who import and use goods from other countries pay the tariffs in order to obtain the goods from Customs. They then may or may not pass on the full cost of what they have paid in these taxes to other businesses, customers or employees.
The impact of tariffs on the level of imports is, therefore, indirect. Tariffs raise the cost of goods for Americans, so American demand for foreign goods falls – marginal cost and supply and demand curves. As American demand for foreign goods dries up, the foreign economy loses revenue. And so will Trump’s proposed tariffs “discipline” our trading partners.
To bring facts to bear on our thinking about tariffs, I ran across this article, “Who Pays Tariffs? Americans Will Bear the Costs of the Next Trade War,” from the Tax Foundation earlier this week and thought I’d share it with you.