President Donald Trump announced on Sunday that he was dramatically increasing tariffs on Chinese goods this Friday, increasing them from ten to 25% in an effort to hustle along a long-sought trade deal between the two countries. In announcing the change, the president seemed to misunderstand how tariffs actually work.
“The Tariffs paid to the USA have had little impact on product cost, mostly borne by China,” Trump tweeted. “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!” The President added that an extra $325 billion worth of untouched Chinese goods would also soon face tariffs of 25%.
In fact, U.S. consumers pay the costs of these tariffs, as sticker prices go up on consumer goods. Research finds that Chinese exporters rarely lower their prices to absorb the cost of tariffs, and U.S. distributors instead raise their prices to cover the costs, passing those costs on to U.S. consumers.
According to a paper published March by economists Mary Amiti of the New York Federal Reserve Bank, Stephen J. Redding of Princeton University and David Weinstein of Columbia University, practically all of the effect of the tariffs “fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters.” According to their estimates, the total cost of tariffs on importers and consumers was nearly $1.4 billion a month.
In another survey, researchers at the Federal Bank of Atlanta, the University of Chicago and Stanford concluded that tariffs had led to nearly $33 billion worth of reduced investment in the U.S. in 2018 alone.
Trump administration has been in engaged in protracted talks with China over a new trade deal. The main selling point of the deal is that it would supposedly see China purchase $1.2 trillion of U.S. goods over the next six years, including an extra $30 billion a year worth of agricultural exports. But the long-winding negotiations have clearly irritated Trump, and the tariffs are intended to pressure China to speed up the talks ahead of a meeting with Chinese Vice Premier Liu He on Wednesday.
In response to Trump’s tariffs, the Chinese have slapped their own tariffs on a number of American goods including dairy, pork and soybeans, the U.S.’s top agricultural export to China.
This in turn, has devastated U.S. farmers, whose sales of soybeans to China have plummeted 94 percent since the counter-tariffs. As the Wall Street Journal noted in February, farmers in the Midwest are filing for Chapter 12 bankruptcy at a rate not seen in the last decade.
In response to the crisis farmers are now facing over tariffs, the Trump administration announced a subsidy program for farmers, but it has distributed less than a billion of the $12 billion promised. It was also inactive during the Government shutdown in January and December, further limiting its ability to help struggling farmers.
It’s still unclear whether any new trade deal between China and the U.S. would be able to mitigate the damage that Trump’s tariffs have already wrought.