Who pays tariffs?

As President-elect Trump weighs up the tariffs he has promised to impose, it is important to understand who will pay them.

There is a popular misconception that when a country imposes tariffs on imported goods, it is punishing a foreign government or foreign firms. This is not a mistake made by economists. The tariff is paid at point of entry, and much of it goes to the government that imposed it. It is paid by the importer, a probable wholesaler, who passes it on in the form of higher prices for his or her customers.

The usual aim of the tariff is to make imported goods more expensive so that people will buy good produced domestically instead. It gives the domestic producer an advantage by making the imported version more expensive. The government that imposes tariffs is punishing its own citizens, not foreign ones. It benefits home producers at the expense of home consumers, with the government collecting the money. It thus has a similar effect to a tax increase, in that money goes from the wallets and purses of its citizens and into the Treasury coffers.

Adam Smith pointed out that ‘By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries.’ Indeed it could. The citizen who buys it gains a bottle of wine for (say) £30. If they buy the imported wine they also have a bottle of wine, but they also have £29 left in their pocket. Buying the cheaper imported good has made them richer.

The domestic government could protect its Scottish winemakers by putting a tariff of £29 on imported wines. This would deny its citizens the opportunity to buy £1 wines, and lead them to buy £30 wine, making them poorer.

Trump’s tariffs will be paid by American citizens. It will make their goods more expensive. True, it might also hit foreign firms and foreign workers be reducing their sales in the US. And their own governments might retaliate with tariffs of their own, making their own citizens poorer.

This is not the way to go. As Adam Smith observed, trade without tariffs makes people richer. The more trade, the more wealth. Tariffs impoverish everyone. They are a bad idea.