Do US Buyers Bear the Cost of Import Tariffs?
By Ian Sheldon (sheldon.1@osu.edu)
To trade economists this seems a rather odd question, the answer to which would be: well of course tariffs impose costs on buyers (consumers and firms purchasing inputs), and the basic explanation can be found in any undergraduate international economics textbook.
US supply and demand conditions for a single good are shown in the figure, where in the absence of a tariff, US buyers purchase Q4 of the good, paying the world price, while US firms produce Q1 at the world price, the difference between Q4 and Q1 being imports. If a tariff t is imposed, the US price of the imported good rises once it leaves the port. Faced with a higher price, US buyers demand less of the good at Q3, while US firms supply more of the good at Q2, the level of imports decreasing.
Given the increase in US prices, the loss to buyers is the area a+b+c+d, which can be divided into “transfers” and “inefficiencies”. Area a is the transfer from US buyers to US firms, who now receive a higher price, while area c is the transfer from US buyers to the US government in the form of tariff revenue. Areas c and d are societal losses, the former being due to inefficient expansion of US production, the latter being due to some buyers dropping out of the market, and those continuing to buy having to pay a higher price.
The key difference between a tariff and a consumption tax is that while both see buyers paying a higher price for the good, the latter results in the inefficient reallocation of resources. In principle, this inefficiency might be partially or even totally offset if the world price of the imported good falls, i.e., given the size of the United States, any reduction in its imports could result in exporters being forced into cutting their prices, what economists call a terms-of-trade effect.
Despite the analysis of economists, claims have been made that US buyers do not bear the costs of tariffs (Maggie Astor, New York Times, August 25, 2024). However, the trade war of 2018-19 provides a natural experiment where average US tariffs against Chinese imports were raised to 20 percent, with multiple peer-reviewed studies finding US buyers bore the cost of US tariffs, and no evidence for terms-of-trade-effects (Pablo D. Fjagelbaum and Amit K. Khandelwal, “The Economic Impacts of the US-China Trade War,” Annual Review of Economics, 14 (April): 205-28, 2022).
In light of the possibility an incoming administration could raise tariffs on all US imports from China to 60 percent, along with a 10 percent tariff on all other imports (Thomas B. Edsall, New York Times, August 28, 2024), there is clear potential for a significant increase in the costs borne by US buyers. A recent study by the Peterson Institute of International Economics (PIIE), presents updated estimates of the cost of the 2018-19 tariffs, along with estimates of what the costs of any new tariff increases could be (Kimberly A. Clausing and Mary E. Lovely, “Why Trump’s Tariff Proposals Would Harm Working Americans,” PIIE Policy Brief, 24-1, May 2024).
Bottom-line: the US-China trade war resulted in costs to US buyers equivalent to 0.4 percent of US GDP, and if all the proposed new tariffs are put in place, the cost to US buyers would rise to 1.8 percent of US GDP, i.e., $500 billion a year. Importantly, these estimates should be treated as a lower-bound to the costs of the United States raising its tariffs, as they exclude any damage to US exporters due to say China and other countries retaliating with their own tariffs.
