Who Pays for Tariffs?

Published: Dec 05, 2019 Duration: 00:03:44 Category: Nonprofits & Activism

Tags : united states trade China global economy geopolitics international relations Diplomacy election 2020 tariffs expert Consumers nonprofit CFR trade war foreign relations think tank Shannon K. O’Neil Vice President of Studies

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Intro You’ve probably heard a lot about tariffs in the last couple of years. But what are they, really? And when countries impose them, who wins? And who loses? What are tariffs Tariffs are essentially a tax on anything imported. Businesses that buy foreign goods pay this tax to their national governments. For example, if the United States imposes a tariff on goods from China, American companies importing those goods must pay U.S. customs to bring them in. After that, a few things could happen. The Chinese company might cut prices so potential customers stay happy and keep buying their products. But let’s say the Chinese company doesn’t cut its prices. In that case, the importing company in the United States might accept a smaller profit to keep its own customers happy. But what typically happens is that businesses pass some or all the costs of that tariff on to consumers. So prices rise. And the consumer ends up paying more for the same product. Or they just don’t buy the product at all. But why do governments use tariffs in the first place? Why do governments use tariffs One reason is to try to protect or prop up domestic industries that are losing out to imports from foreign competitors. Another is to retaliate against unfair trade practices by foreign governments. For most of the last century, tariffs fell out of favor. Much of the world came to see freer trade as a benefit. It boosted growth. It expanded consumer choices. It lowered retail prices. The competition fostered and encouraged innovation. This made companies more efficient. It also made them more profitable. But, recently tariffs have surged back into prominence as a favored tool of President Donald Trump. Trumps tariffs He’s used them more than any president since Herbert Hoover. He has slapped them not only on China, but also on U.S. allies like the European Union, Mexico, and Canada. These tariffs mean U.S. producers that import materials or parts, they have to pay more. That makes products more expensive. And that leads to fewer sales and more job losses. Tariffs also invite retaliation which has led to reduced exports. Take China. USChina trade The United States is China’s biggest trading partner. It imports more than half a trillion dollars in goods every year. As Americans buy iPhones, clothing, washing machines, and much more. But the U.S. also exports $120 billion dollars a year to China. These are things like aircraft, machinery, and soybeans that all head east. So after President Trump imposed tariffs on $250 billion dollars worth of Chinese goods in 2018, China responded with tariffs on U.S. goods. This led to a drop in U.S. exports to China. Global trade Predictably, bilateral trade between the two giants fell. Partly as a result, trade and economic growth are slowing worldwide. Traditional trade patterns are shifting too. U.S. companies are buying more clothes from Vietnam and more smart phones from South Korea. China is now getting more of its soybeans from Brazil and Argentina. And across the United States, farm bankruptcies are on the rise. In response, the U.S. government has pledged nearly $28 billion dollars in subsidies for American farmers. US subsidies That's about $7 billion more than the government is taking in from China tariffs. So yes, tariffs offer a potent weapon for countering unfair trade practices. But tariffs also raise costs for local companies. This leads to lower demand for their products, it reduces their sales abroad, and costs jobs and profits. It also unsettles global markets. So, in the end, who pays for tariffs? As we've seen, it's usually you, the consumer.

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