There has been a lot of discussion around tariffs this week with some misinformation about who is paying for the tariffs that the US and China have imposed. Claims have been made that US has collected billions of dollars in revenue from China as a result of the tariffs placed on Chinese imports. That is inaccurate and possibly a fundamental misunderstanding of how tariff collection works.
Claim #1: The US has collected billions of dollars in revenue from the tariffs imposed on imports from China.
The US Customs & Border Patrol agency is the government agency that collects tariffs. They reported collection of $15.3 billion in revenue from the tariffs imposed on Chinese imports in the fourth quarter. Claim #1 is accurate.
Claim #2: China has paid the US billions of dollars in tariff fees.
This is how tariff collection works:
When imported goods land on the docks in US ports, US Customs collects the tariff but the tariff is collected from the US company that is buying the goods not the foreign country or business that shipped the goods. As a result, the US has collected billions of dollars in revenue from US companies not from China. Claim #2 is inaccurate.
China may indirectly pay for the cost of tariffs in two ways:
This same dynamic works for the tariffs that China has imposed on US exports. Once again, China collects no revenue from US companies; they collect the revenue from Chinese businesses that buy the imported goods.
Large US companies may not pay any tariffs if they have multiple supply chains and can shift their purchases to another country. Unfortunately, small businesses do not have near the flexibility to make that type of shift. Many small businesses have only their Chinese supply chain and cannot quickly shift to another country.
The reality is that businesses in both the US and China are bearing the burden of paying the tariffs. Both countries are collecting revenue from the tariffs but they are collecting it from their own businesses. Depending on how much businesses are able to pass the cost of the tariffs onto the final buyer of their product, US business and consumers ultimately pays for the tariffs.
Trade negotiations continue and an ultimate resolution may still be achieved. In the meantime, it is important to understand who is footing the bill for the tariffs in order to understand where the unintended consequences may come from and the potential impact to the economy.
The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.