It’s all but inevitable that we veteran international trade negotiators at some point in our career will find ourselves in a grand office with the senior-most political leader of a country explaining the mundane process of how certain trade policies actually work. It could be one’s own President; a nation’s leader from the opposing side who wants to get a technical explanation of the contours of a counteroffer directly from the “horse’s mouth” of the negotiator; or the prime minister of a third-party country for whom you have been hired to provide independent counsel on a trade negotiation he or she has underway with another country’s head of state.
From his tweets, his jousting with the press on the White House lawn as prepares to board Marine One, or in his speeches
at his almost weekly rallies across the country in arenas filled with his supporters, it is clear that U.S. President Donald
Trump is in dire need of such assistance—in particular, with respect to how tariffs on U.S. imported merchandise are
administered and the economic incidence of the payments of such tariffs. For months on end, Mr. Trump continues to
repeat his false assertion it is China who pays the tariffs he’s imposed on Chinese produced goods imported by the U.S.
A recent example will suffice. On May 5, 2019, Trump tweeted: “For 10 months, China has been paying Tariffs to the USA
of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods.”
Such utterances no doubt resonate with the president’s base—at least they did during the early stages of Trump’s trade
war with China—which he initiated on April 3, 2018 with his announced plans to impose the 25% tariffs to which his tweet
refers on 1,333 Chinese products that covered just over $46 billion of U.S. imports from China. But the statement is as
factually incorrect as asserting that Mondays follows Tuesdays on the weekly calendar.
One can only conclude that either Mr. Trump has not been sufficiently or correctly briefed by the U.S. Trade
Representative, Robert Lighthizer, or the Chairman of the President’s Council of Economic Advisers, Kevin Hassett, on the
simple mechanics of how import tariffs are administered; he doesn’t comprehend what has been explained to him; or
worse yet, he refuses to acknowledge that actually he does understand how import tariffs work, hardly an arcane bit of
knowledge one presumes any student attending the Wharton School—from which Mr. Trump was graduated in 1968—
would easily master.
How and where in the “stream” of a cross-border merchandise transaction import tariffs are levied by any country is
straightforward and indicates in black and white who pays them.
Tariffs are imposed by the government of the importing country (say, the U.S.) on top of the price and shipping costs of
the foreign-made product as it first hits customs onshore in the importing country. Thus, in the first instance the tariff on
imports is paid by customers in the importing country—whether the direct end-using consumers or businesses, or by
companies that in turn resell the product, perhaps after further processing, within the importing country. In the U.S., the
agency collecting tariff revenues is U.S. Customs and Border Protection, which is part of the Department of Homeland
Import tariffs are not imposed by the government of the importing country on the product before it passes through the
exporting country’s (say, China’s) customs agency and it moves offshore, wending its way to the shores of the importing
country. In other words, U.S. Customs and Border Protection does not collect its tariff revenue from customers
(consumers or companies) within the exporting country—in this instance China. Maybe that is how Mr. Trump believes
import tariffs work!
Nor is it the case that Chinese customs officials collect tariff revenues on behalf of U.S. Customs and Border Protection
from Chinese consumers or companies at customs stations within China before Chinese-made goods are shipped abroad.
Now, if Trump were able to pull off that scheme, it would be one mean feat!
(It is true that in certain circumstances, governments may exact tariffs on their own countries’ exporters. Historically, this
has been the case for countries highly dependent on natural resource exports as way for governments to capture
“economic rents.” But export tariffs are hardly at play in the U.S.-China trade imbroglio.)
To be sure, the foregoing explanation of who administratively pays import tariffs is rudimentary. It is deliberately so, as is
the frame of the President’s tweets and assertions. Perhaps it will help telegraph to the president how to think about the
actual workings of his import tariffs on Chinese goods.
Of course, it does not sufficiently capture the complexity of the multiple transactions, including physical transformations,
which an imported product may experience in today’s globalized economy before its ultimate purchase by the end-user.
Such an analysis would give an even richer picture of the economic incidence of the costs of the U.S. import tariffs on
To this end, a number of my fellow Ph.D. trade economists have undertaken various quantitative estimates at the macro
level of who is absorbing the costs of Mr. Trump’s tariffs. The most recent set of calculations on this score is a study
written by the International Monetary Fund’s (IMF’s) chief economist and her colleagues. They estimate that the costs to
date of the tariffs have been borne almost entirely by U.S. importers. In addition, in light of the fact that most of the 2018
tariffs imposed by Trump were on Chinese capital goods, as economic theory would suggest, the (IMF) calculations
indicate that while some portion of the tariffs has been passed on to U.S. consumers, another portion has been absorbed
by the U.S. importing firms through lower profit margins.
Complementing the IMF’s research, the Federal Reserve Bank of New York (FRBNY) recently estimated
the prospective costs of the 15 percentage-point increase in tariffs that Mr. Trump announced in May 2019. These will
cover about $300 billion in U.S. imports of Chinese consumer goods, including clothing, mobile phones and toys. The
FRBNY estimates these will result in an annual cost of $831 per American household. This is about twice the size of what
the FRBNY estimated as the costs on U.S. consumers from Trump’s 2018 tariffs. Importantly, the May 2019 tariffs, along
with those in place since 2018, would mean that essentially all Chinese imports to the U.S. have been subjected to
increased tariffs by the Trump Administration.
If neither the rudimentary analysis of how tariffs are administered nor the quantitative estimates are not sufficient to
convince the president who actually pays or bears the costs of his import tariffs on China, he need only reflect on the aid
he is providing to U.S. farmers as a result of China’s retaliation to Trump’s actions.
Just this May, he approved $16 billion in such support. This in on top of the $12 billion he doled out last year to U.S.
farmers. Of course, farmers are part of the president’s base. That he is trying to appease them through earmarked
compensatory payments illustrates the point made above that while they may have initially supported his tariffs on China,
the negative impacts on their wallets has deflated their expectations that the President’s policy—at least to date—has
been serving their best interests.
Regrettably, for Mr. Trump, there are other constituencies of his base throughout America’s heartland, Rustbelt and
elsewhere that are feeling as much pain as farmers from his 2018 tariffs—or will do so shortly as the bite of his newest
wave of tariffs kick in.
Perhaps saddest of all is the fact that imposing tariffs on merchandise imports—the president’s choice, if not sole,
instrument to seemingly induce WTO-sanctioned “behind-the-border” reforms of China’s economic regime, such as a hold
by the state on the free play of prices, weak protection of intellectual property, provision of huge subsidies to state-owned
enterprises by state-owned banks that only pretend to require debt repayments, and artificial barriers to market entry and
exit—simply will not work.
We Americans are willing to endure pain for gain. But let’s not fool ourselves into thinking as Mr. Trump does, that simply
eliminating our bilateral merchandise trade deficit with China, which in and of itself is not an economically meaningful
objective but which his tariffs may well do, will alter the core of China’s conduct in the global trading system.
In a nutshell, no matter how high or expansive are tariffs, they will not create effective incentives for China to execute the
fundamental market-oriented reforms Beijing legally obligated itself to undertake in its 2001 WTO Accession
Agreement. That is the real endgame.
Achieving that goal–necessitating a reduction in the fundamental role of the state in China’s economy, which of course
Chinese President Xi Jinping is loathe to do since that is the raison d’etre of the Communist Party–is a wholly different
matter. That would require both using a different arsenal and employing a fundamentally different strategy,
especially marshaling a multilateral coalition of the world’s leading trading partners. Our president seems to be moving us
further away from that path each passing day.
Harry G. Broadman is a Managing Director and Chair of the Emerging Markets Practice at the Berkeley Research Group LLC, a
global consulting firm, where he works on international trade and investment disputes; antitrust and regulatory litigation; market
intelligence and investigations related to reputational and corruption risks; and corporate strategy and operations. He is also a
member of the Johns Hopkins University Faculty, a Board Governance Fellow and Master Workshop Faculty Member at the National
Association of Corporate Directors (NACD) and serves as an independent director on several corporate boards. He is former United
States Assistant Trade Representative; Senior Managing Director at PricewaterhouseCoopers and PwC Chief Economist; Managing
Director at Albright Capital Management; a World Bank official in China, Russia The Balkans and Africa; Chief of Staff of the
President’s Council of Economic Advisers; a faculty member at Harvard University; on the RAND Corporation staff; and a fellow at
the Brookings Institution.