how do tariffs on exports work. The R’s are saying increased tariffs won’t cause manufacturers/distributors to pass the costs onto consumers here in the US. I was wondering if American manufacturers follow that same model. Are goods exported to foreign countries outside the US subject to tariffs, and are those tariffs absorbed, or passed onto foreign consumers?
In: Economics
The term you’re looking for is [“tax incidence.”](https://en.wikipedia.org/wiki/Tax_incidence) The way the increased cost of any tax, tariff, sales, etc, is split between the consumer and producer depends on the elasticity of supply and the elasticity of demand for that product. So, it really depends on the product.
Tariffs are on IMPORTS, not exports.The idea behind tariffs is to raise the price of goods from overseas to protect a domestic industry. Typically, a country wants to protect its own producers because the foreign competitors either have government subsidies or lower production costs.
If the item subject to tariffs is a part in a product, then the manufacturing costs go up. The manufacturer will raise prices. For example, if a car company was buying screws from China for 4 cents each, but with the tariff, they cost 8 cents, and there are 200 screws, the cost of manufacturing the car went up $8. The car company can eat the $8 or raise the price. But if the article is a battery with $400 tariff, the company may pass the cost.
Hi, I’m the president of France.
I want people to buy French cars because, when they buy a US car, that money goes to the US. If they bought more French cars, our country would be richer. But US cars are popular. How can I convince more French people to buy French cars?
Aha! They would buy more French cars if US cars were much more expensive because everyone likes saving money. Now, how do I make that happen?
I can’t order US car companies to raise prices… but I *can* demand those companies pay my government a fee for every US car sold here in France. I’ll call it a tariff, and it’s a kind of tax since people pay money to the gov’t. I’ll set it to… let’s say 30%. US cars cost the normal amount plus an extra 30%.
Will the US gov’t pay that? Nope, they’re not involved. Will the US car companies pay that and keep prices the same? No, because then they’re earning less on each. Instead, they increase the customer’s cost of buying a US car by that tariff rate. A US car costing a French person $20K would now cost $26K (in France), so more French people would be interested in buying French cars to save money.
>The R’s are saying increased tariffs won’t cause manufacturers/distributors to pass the costs onto consumers here in the US.
PS: These same R’s are also saying we cannot raise the minimum wage because businesses will pass the costs onto consumers here in the US.
I work for a wholesaler/manufacturer that imports a lot of products, so I have a bit more direct experience with tariffs than most people do. Not that it’s a terribly difficult concept, it’s just that usually tariffs and things like them are obfuscated beyond the view of the consumer.
So, that said:
The R’s are lying. Straight-up.
When we place an order with a factory in India, there are costs associated with that order. Those costs include:
* The cost of the product itself (which includes the cost of labor, the cost of equipment, and the cost of the raw materials)
* Shipping from the factory’s home port to our port in the US
* The exchange rate between our two currencies
* Taxes and import duties.
When we receive that order from the factory, ALL of those costs are figured in to the final price for our products. If cotton becomes more expensive, then our products will be more expensive. If the factory starts paying its workers more, then our products will be more expensive. If the exchange rate shifts unfavorably, then our products will be more expensive. And if an orangutan in a suit slaps an arbitrary 10% tax on those goods because they come from India, our products will be more expensive.
We have profit margins that we have to maintain in order to pay for our facilities and the salaries of our employees and contractors. We can’t just absorb extra costs, especially if we have reason to believe that those costs are going to persist.
When Trump forced extra tariffs onto our products, we raised our prices. Something that used to cost the end consumer $8/unit now costs them $10/unit. We didn’t put out a flashing neon sign that said, “Oh, we raised the prices on this because of Trump’s tariffs,” but that was absolutely why we did it.
We are not unique. When the cost to import increases, companies don’t just nobly take it on the chin and maintain their prices. They adjust the price to adjust for it.
And some might say that’s fine, it makes American producers more competitive. The thing is, though, it really doesn’t. If American producers were really close enough that a 10-20% tariff would make them price-competitive with imports, globalism would never have become the thing that it is. Even after adjusting the price to reflect the tariffs, foreign goods are still cheaper than American goods in many cases. So all you’ve done is made the products that most people were buying more expensive while reducing the pressure on American companies to innovate ways to bring their costs down.
There is reason to use tariffs, but usually for strategic rather than economic reason. Steel is a good example. America has a huge military and military is very hungry for steel. If a war happens and you suddenly need to increase your military production, you need massive amounts of steel. If you’re dependent on a foreign supplier, you might not be able to make all the steel you need – especially if that foreign supplier is who you’re at war with.
So you need the capacity to make literal tons of steel, but you don’t necessarily want to just pay companies to sit around on the concept of a plan to make more steel. You need them to be able to survive on their own with the capacity to make as much steel as you need, but you’d like them to survive on their own. You could give them the money, but then you’re just giving a private company taxpayer funds, and that’s not very popular.
Or you could let the market sort itself out, but that wouldn’t end well. US labor is more expensive than most other labor on the planet, and that impacts the price of goods. US-made steel is about $700/ton, and Chinese-made steel is about $500/ton. Some people might be happy paying an extra 40% to buy US steel for whatever reason, but most people who need steel just need carbonated iron. They don’t need whatever might be special about US steel, so they’re going to choose the cheapest option. So left to their own devices, US steel manufacturers would likely go out of business.
Enter the tariff. If you can artificially make Chinese steel more expensive, then the disparity between Chinese steel and American steel isn’t so drastic, and more companies will be willing to buy American steel. This allows your American manufacturers to limp along until you need them. They’re still not doing great, but they can survive.
So it’s not that there isn’t a reason for tariffs, but the whole reason you use a tariff is to increase the price of a foreign-made product. So if you’re trying to sell tariffs to the American public, telling them that tariffs won’t increase the price of foreign products is a bald-faced lie. That’s the entire point of tariffs.
Let’s say that Mexico can grow sugar cheaper than it can be grown in the US. They have a warmer climate, more rainfall, and sugar grows easier there. Many consumers want to buy sugar at lower prices and don’t really care where it’s grown. In a free market, this would mean that sugar farmers in the US would go out of business, as they can’t compete with the lower costs of growing sugar in Mexico. They’d probably end up growing something else instead, like corn, which seems well suited for farmland in the US. However, there might be some costs associated with switching from sugar to corn, and also change can be scary.
Let’s say politicians in the US want to support American farmers. It’s a very popular political position and gets them more votes. They want to make sure that American sugar farmers stay in business. They do this by imposing a tariff. A tarriff is a tax on imported goods. So now, sugar from Mexico can’t be sold as cheaply in the US. US consumers who would buy sugar at lower prices are forced to pay higher prices. This also means that sugar farmers in the US will be able to sell their sugar at those higher prices and they can stay in business.
So yes, tariffs raise prices to consumers.
Now, let’s go a step further. With sugar prices in the US being artificially high because of the tariffs, some other things start to happen:
First, politicians can waive these tariffs as a political tool, granting favors to certain businesses. So let’s say that the city of Chicago sets up a special method for Tootsie Roll to bring sugar into the US without having to pay the sugar tariff. This would give Tootsie Roll a huge advantage over other candy makers. This would also mean Tootsie Roll would have a huge incentive to operate their business in Chicago, providing jobs and tax revenue to the city of Chicago.
Another thing that might happen when sugar prices are artificially inflated is that people in the US start looking for cheaper ways to sweeten things. Maybe they find a way to use corn, which grows plentiful in the US, to make a sweetener. They process corn and create High-Fructose Corn Syrup. HFCS makes a great sugar substitute. It’s significantly less healthy than sugar, but since there’s a tariff on sugar in the US, it’s cheaper. And so, the US starts using HFCS to sweeten things, like Coke. Coke in Mexico still uses real sugar because sugar is still cheaper in Mexico, and healthier than HFCS.
In the end, because politicians stepped in and put a tariff on sugar:
American sugar farmers can keep growing sugar instead of growing corn.
American corn farmers get to sell their corn to become artificial sugar.
American people see increases in diabetes due to artificial sugar.
American consumers have to pay more for sugar.
Certain American businesses get special favors.
Mexican Coke becomes a sought-after item in America.
Two things –
Imports – it will literally be 20% (or whatever value) more expensive to bring things into the US. This means those goods will be similarly more expensive on the stands OR they will not be sold as frequently and replaced instead by internally produced goods.
For some stuff this is more realistic than others, and also takes into account how prepared we are to replace those goods – ie for a lot of manufacturing or production we are not that well prepared, so basically we need to export and will eat those costs.
Exports – other nations will place these on our goods. The cost is not paid by producers directly (or US consumers), but will be paid on import at the destination port. Meaning – other markets may either have to pass the cost on to their consumers, or opt to replace with their own local products.
Like the Import path – this takes into account how well other countries (ie China) are established to better meet their own internal needs. Probably better than we are, for most goods, frankly. Or they’d at least have alternate options – ie Brazil for produce.
The net is generally – more expensive goods in the short term as these are major economic adjustments to work through and don’t happen overnight. And this can mean inflation but also loss of economic opportunity in some sectors as they shrink due to a shifting demand reality (ie as they get cut off from markets).
Long term, maybe you have a re-alignment to more localized production in both places – which is why tariffs existed in the first place, effectively to protect local industry from the influence of external actors. This can arguably be a positive but again, would need us to ramp up capacity to satisfy the population at a similar level as 50 years of globalization have grown to accomodate. Likely that doesn’t happen overnight.
other countries will impose tariffs on their imports in reciprocity, and US exports get more expensive, which ends up costing US jobs/industries.
The tariffs from 2018 made China raise soybean import tariffs from the USA. US soybeans became much more expensive, so China started imports from Brazil. Which leads to more rainforest clearing and decimated US farmers.
https://farmdocdaily.illinois.edu/2024/09/trade-policy-shifts-and-their-potential-implications-for-u-s-agricultural-exports.html
https://gjia.georgetown.edu/2022/10/26/policies-and-politics-effects-on-us-china-soybean-trade/
I worked for a small “outdoor gear” firm when the first Trump tariffs were put in place. Overnight, our cost of goods increased 12%-15% depending on the item.
At first, it squeezed our margins. We made less profit for every item we sold. After 6mo or so, it became clear that the tariff was not going away, so we increased the retail price relative to our margin, such that our profits returned to pre tariff %’s.
So yeah, if it’s made in china and its subject to a tariff, it’s going to get more expensive…
Just know that raising our tarriffs means china and everyone else we rely on will raise theirs in retaliation and then we’re all going to hell just like what happened during great depression.
If you ask politicians their plans never negatively affect their constituents. If you ask economists they’ll tell you that tariffs negatively affect both the buyer and the seller The buyer is forced to pay an inflated price. And the seller will lose customers.
But that’s not all. It will have a knock-on effect in adjacent industries. For example, a tariff on steel means anything with steel is more expensive, which can start to harm businesses (see also Case-Labs). A tariff on Chinese electric car imports means American carmakers do not have to compete, which is great for them and terrible for consumers.
TL:DR; politicians lie.
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