One of the more distressing and distressingly fundamental misunderstandings of trade economics is the question of who pays tariffs? The people whose pockets become lighter are those inside the tariff “protections” and thus it is they who pay them. It is vital to understand this as we consider Trump’s most recent actions upon those trade tariffs. It is American consumers who will pay them, not foreigners.
This understanding isn’t aided by the manner in which the issue is reported. The Financial Times tells us “US to impose tariffs on EU, Canada and Mexico,” The Independent says “US to impose steel tariffs on EU from midnight after talks break down,” and The Guardian writes “US hits allies with steel tariffs to spark trade war with EU, Canada and Mexico.”
All of these headlines are the wrong way around. The tariffs are to be imposed upon goods from those places and countries. The people who will pay them are American consumers. The correct headline is therefore ”Trump imposes taxes upon Americans who buy foreign products” or some such variation.
[Related: ‘This is dumb’: Ben Sasse hits Trump over steel tariffs against Canada, Mexico, Europe]
Just for the avoidance of doubt, work with me through the details of what happens here. Someone in Europe sends some steel to the U.S. The federal government imposes a 25 percent tariff upon this steel. It isn’t the plant nor the people in Europe who pay this tax. It’s the importer into the U.S. who does. The importer then adds that tax to the price charged to American consumers. Whose price goes up as a result of the tariff? The price for Americans living in America. So who pays the tariff? Americans.
It does get worse too. The point and purpose of the tariff is to increase the price of all steel in the U.S. The foreigners are selling it too cheaply for American plants to make a profit. That’s why the tax is imposed in the first place, to make the foreign steel more expensive. That makes all American steel more expensive too, that’s why it’s being done, by removing that competition.
The people who pay tariffs upon imports into the U.S. are Americans in the U.S.
This is why economists are so adamant that tariffs and trade wars are such a silly economic idea. They make the people supposedly protected by them poorer. And we just don’t see it as a reasonable nor even decent part of economic policy to make our own citizens poorer. Quite the contrary, we rather think that the aim and point of government is to make the citizenry richer.
It’s entirely true that the people who own and work in American steel plants (and aluminium, for there’s to be a tariff there as well) plants will be richer as a result. Which is why both the steel owners and the steel workers have been so vocally in favor of these tariffs. But why 330 million people should be poorer so that a couple of hundred thousand benefit is difficult to divine.
I once pointed out that “a protectionist is someone who argues that you should be poorer so that they can be richer.” That is what is happening here, and it’s not a good deal for near all of us.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
