Who Pays?

Now that tariffs have risen to 25% on $200 billion of Chinese imports and may be extended to $300 billion more, there has arisen a controversy about who pays these tariffs. Trump says China does and Goldman Sachs says the US consumer does. Let’s investigate ...

Assume that Walmart now buys Barbie dolls made in China for $4 and sells them for $10. When a 25% tariff goes into effect, the price to Walmart or its wholeseller would go to $5. But wait, Walmart might say (as it often does) that this is too high ... and so demand that the Chinese manufacturer eat all or part of this increased cost.

Let us assume that the Chinese manufacturer  eats it all but turns to Xi to help out. These Chinese government can do many things to help out:

- It can subsidize this manufacturer with tariff offsets or low cost loans

- It can devalue the yuan so that the $3.20 it then gets for each Barbie doll buys more yuan which it uses to pay its workers

So this example would validate Trump’s claim. Of course there are US importers who don’t have the buying clout of Walmart so here the American consumer would pay a higher price ... or the American importer would make a smaller profit.

In truth, both things will happen ... to what extent one cannot predict precisely. My suspicion is that China will bear the largest part of any tariff increases. But, if, not, America’s inflation rate will go up which is not happening currently.

So watch the future US inflation rate to see whether Donald Trump or Goldman Sachs were more right now.