Proposed Chinese Tariffs Will Raise Taxes Following a Large Tax Cut
March 20, 2018
President Trump announced this week that he is planning to place $60 billion of tariffs a year on a wide range of products imported from China. This tariff package is a response to some of China’s questionable trade practices, which can require U.S. companies to transfer technology or intellectual property in order to access China’s markets. Though the rhetoric implies that these tariffs will be “slapped on China,” it is crucial to recognize these tariffs are actually taxes on Americans who consume products from China—meaning Americans will directly and immediately bear the burden of any tariffs, not the exporting companies.
Though the formal proposal has yet to be released, these tariffs will likely be the broadest package imposed by a modern U.S. president on products from China and are double the proposal first given to the president by the U.S. Trade Representative. The sheer size of this package is massive. The $60 billion in proposed tariffs is more than 20 percent of the recently passed tax cuts expected in 2019. And, as 45 trade associations warned in a letter to President Trump, these tariffs could potentially provoke retaliation that would negatively impact U.S. agriculture, goods, and services exports and further raise costs for businesses and consumers.
The tariffs, which the administration could impose as early as this week, would be paid to the U.S government by whomever brings the products into the country. In other words, the “tariffs on China” would actually be paid for by American companies that import products from China.
Faced with higher prices, because of the taxes they would pay on their imports, companies essentially have two options. First, they can pass the higher costs along to us, the consumers. As a result, Americans would be forced to pay higher prices for more than 100 products, ranging from electronics to clothes to shoes. This would leave consumers, and especially lower-income households, with less money left in their budget to spend on other items, which in turn would reduce economic activity.
If companies cannot pass the higher costs on to their customers, then the second option is that they must absorb the higher costs. This reduces profits, which reduces the amount of money companies have to invest, hire workers, or increase wages. In businesses with low profit margins, it could mean lower returns to shareholders, or even going out of business. Regardless of whether the cost of tariffs is passed on to workers, shareholders, or consumers, it is American households that bear it.
It is also important to recognize that many products the U.S. imports from China are components used as inputs to produce other goods, otherwise known as intermediate goods. Placing taxes on these inputs raises the cost of production for U.S. companies compared to foreign competitors, placing U.S. companies at a comparative disadvantage and further reducing economic activity. Higher prices for businesses, as described above, reduce profits and can lead to losses in employment, as was the result for companies that had to pay higher prices caused by steel tariffs in 2002.
Though these tariffs would discourage imports from China, they would also cause direct and immediate harm to U.S. businesses and consumers that could intensify over time if retaliatory actions were taken. There is wide agreement that China’s unfair trading practices need a response; however, the proposal of broad tariffs under consideration is not likely to result in changes in Chinese government policy. Imposing a new tax of $60 billion on Americans would put U.S. businesses at a comparative disadvantage, increase prices for American consumers, and reduce economic activity and growth while likely failing to achieve policy goals.