Implementing tariffs: who pays what, where the money goes

In My Humble Opinion
1

Suppose, as is likely, that the new U.S. administration enacts its 100% tariff on Chinese goods, to apply to the wholesale price. Suppose we’re talking about a Chinese TV at Wal-Mart (2024 cost to Wal-Mart: 300$, price to customer: 400$).

The common understanding is: the tariff will increase Wal-Mart’s wholesale cost by 300$, so the consumer price would now be about 700$, a 75% increase. It could be more if Wal-Mart chooses to increase its margin. So consumers will be forced to pay 700$ for their TV and be unhappy, or choose a TV made in Vietnam and subject to a lower tariff, or made in the U.S. and immune from tariffs.

But that tariff money collected by the government has to go somewhere. It can go into the general coffers of the government, and reduce the deficit. It can be used to finance income tax cuts, with great fanfare. It can go into a special fund that will then be redistributed to taxpayers as a yearly “External Revenue Service” check with Trump’s face on it. The check can be proportional to income so that the poor get less.

A fraction of the tariff money could even go back to Wal-Mart somehow, so that Wal-Mart still has an incentive to choose where they import that TV from (U.S. is better than Vietnam, which is better than China), but the consumer price increase is less than the full amount of the tariff.

Now I understand that administering this would be complex, and introduce a new set of unintended consequences and loopholes, much like income tax has. Even determining what’s Chinese vs Vietnamese vs Mexican would be complicated.

But I can still see this getting accepted by the population in some way. People would like to get a check from the External Revenue Service and/or to pay less to the Internal Revenue Service.

Economists are smarter about this than I am, and they keep saying that it’s been tried before, that tariffs will only increase prices and won’t have a significant effect on jobs in the U.S.

What do you think?

ETA: I’m not advocating for this. I’m in Canada and I’m really worried about tariffs. I just want to understand what’s probably coming.

2

The only way this is a net benefit to American tax payers is if it incentivizes a manufacturer to build TVs in the US so that the consumer can pay less then that same TV from Vietnam, bringing the value add of local employment and increasing the GDP. If they are still cheaper in Vietnam, it won’t work other than to harm the Chinese.

3

It first goes into the pockets of the businesses that sells you the items from overseas and the oligraths that run them. Then to the US treasury in the form of tax collection. But you can bet that theses business will add a surchage of at least 1 to 3% over the tariff as a their cut or that the Trump administration will give them a tax write off that essentially skims off a piece of the pie ffor them.

4

That’s economic nonsense. IF I correctly understood what you meant.

If the TV used to sell for 33% over wholesale cost (400 vs 300) and the tariffed wholesale cost is now 600 the TV will sell for 800. They’ll collect their entire normal gross margin of 33% on the incremental cost, not 1-3%.

This isn’t evil, it simply represents the reality that gross margins are the number they manage to. Because they have to to cover overhead, financing costs, etc.

Or at least they’ll try to hold gross margin and the only thing pushing the other way will be consumers stopping buying TVs, or some other retailer choosing to sacrifice profitability.

Which are the same factors affecting every price every day as their cost of any input from merchandise to labor to rent changes for any reason.

5

Yeah, this. I remember when Trump enacted the steel tariffs the first time around and my workplace was installing some high end play equipment from Europe. We’d buy something for $10,000. Overseas merchants would add a line like “Tariff Charge: $1500” to the bottom of the invoice. We’d enter the cost in as $11,500 and add the usual 28% markup to it.

Manufacturer at least came out even, or better if they were goosing the tariff charge line item
Government got their $1500
We came out ahead since the margin on $11,500 is better than $10,000
Customer got screwed.

[Numbers above for illustrative purposes]

6

You just said the same thing twice, sort of.

It goes into the government’s general revenues.

What the government does with regards to tax cuts or spending is a separate matter. Money is fungible. If I sell you something at a garage sale for $20 and put that in my wallet with many other $20 bills, that money is now effectively absorbed into my general revenue stream. To the extent we can say where’s it been spent, it’s basically chopped up among ALL the things I spend money on. Some goes to beer, some to the car insurance, some to groceries, and so on.

No it does not. They PAY THE TARIFF. They lose the money. The government gets it, full stop, there is no further discussion to be had.

If the retailer can charger you another $300 on a $400 TV - which, by the way, is not precisely what will happen - they they will, but they likely can’t. But they’re not up a dime. YOU are out a lot of money if you’re dumb enough to buy that TV.

This absolutely is not what will happen. They cannot sell a $400 TV for $800 and expect to move any units. They will, for a short period of time, try to scrape out a smaller margin, but they’ll give up selling those TVs soon enough. Possibly instantly. There’s no point placing further POs, and the inventory they already have was brought in prior to the tariff. They’ll do what they can with the stuff already in transit but may have to sell it at a loss.

Look, you need to think about it this way; if they could sell those TVs for $800, they’d be doing it already. But they don’t, because they CAN’T. Those TVs will stop selling entirely. Why would I buy a piece of shit for $800 when a nice Philips is $750?

Instead what will happen is they’ll abandon that brand and sell other TVs… and the price of THOSE TVs will rise. Not 100 percent, but a bit, as the market arrives at new equilibrium pricing.

Chinese consumer goods would be blown out of the market. The price of non-Chinese goods, now under greater demand in a market with less supply, would rise in price.

7

Pretty much what @RickJay said.

I don’t think the OP is wrong, it’s just in practical terms it doesn’t work like that.

Tariffs on raw materials or components increase costs for downstream businesses. As they put it in The Economist (and I’ll butcher the phrasing), it subsidizes uncompetitive industries at the detriment of competitive industries.
You could argue that eventually the US could efficiently produce everything, but “eventually” could be a very long time in some cases, and never in others (e.g. if it requires low labor costs, or a raw material that the US doesn’t have much of). In the meantime, the whole economy is taking a hit but in a very hidden way.

Tariffs on finished goods like phones or TVs disproportionately affect low-income Americans as they spend proportionately more of their wealth on consumer goods (it’s not that the rich are more sensible with their money, it’s how many phones a person needs is not proportional to income). Of course that money could be reinvested in programmes to help the poor. That isn’t what’s happening with this administration though; they are helping the wealthiest hoard more profits while cutting what few ribbons of social safety net remained, as well as anything that is generally helpful to americans like education, safety and environmental bodies etc.

8

I’m extremely disturbed that you’ve hit exactly on the outcome.

9

…except where China is the ONLY supplier of a particular item, in which case either the new tariff-caused price is paid or the consumer goes entirely without. Sure, maybe some entrepreneur starts producing it in the US but it will take time to get that up and running.

Also, Trump isn’t threatening tariffs on JUST China, he’s threatening to impose them across the board.

When that happens and customers at my place of employment are screaming about prices I’ll have to bite my tongue so I don’t blurt out “This is what you voted for.”

10

Tariffs are levied on the FOB value of the shipment.
So the 25% isn’t applied to the freight costs or the on-shoring, customs and into warehouse costs eg freight.
Where there is an add on cost implication is on insurance and financing.
A back of the envelope calculation of the FMCG goods we are importing is about 27.1% increase in landed cost.

On which we would put our standard %GM for recommended retail.

11

Yes, which is a different scneario. If that were to happen, prices soar. No way around it.

12

Question for those who know: What is to stop China from running its products through Vietnam to avoid tariffs? I reckon China can strongarm any eastern country into slapping a “Made In…” tag on its stuff and shipping it out. Who checks the veracity of the retail supply chain?

13

This is what we have rules of origin for — to determine what country a product is taken to be sourced from, so as to establish the tax/trade rules treatment that applies to that product.

As for who enforces rules of origin — the gubmint does. Because this is something that directly affects tax revenue, governments are usually highly motivated to police and enforce these rules, in contrast to tedious pettifogging irritations like environmental regulations and product safety standards, which don’t net the government any money.

14

In the 19th c., except for the civil era when there was an income tax, tariffs funded the entire federal government. Trump has made noises suggesting we abolish the income tax and go back to that system. Of course, tariffs are very regressive, but for the right wing that is a feature, not a bug.

15

And, realistically, the entire federal government can be funded exclusively by tariffs only if the scope and scale of what it does is dramatically curtailed, to levels not seen since the nineteenth century. That, too, is a feature, not a bug.

Mind you, Trump’s bloviationg about using force to take Greenland, Canada and Panama becomes even more absurd if it’s couple with a policy of reducing military spending as a percentage of GDP to the level that prevailed in, say, 1850.

16

Excise taxes pretty much funded the Civil War, more than the small income tax. After the war, customs taxes rose but they were about equal for the next fifty years. Excise taxes were mainly on alcohol and tobacco. U.S. Federal Government Revenues: 1790 to the Present

The federal government couldn’t fund itself any other way until the 16th Amendment was passed. The new income tax, increased along with WWI, allowed Prohibition to be approved since otherwise it would have bankrupted the government.

Excise taxes had public approval because they were sin taxes. E.g., opium also had an excise tax placed on it in 1899.

Taxes are still placed on items subject to public - or, as now, governmental - disapproval. Gambling is highly taxed. But they often backfire. So does removing taxes entirely. They’re a powerful tool and need careful planning and control.

17

Which processes the current regime will no doubt execute flawlessly. /s

:man_facepalming: (Where’s the gleeful vandal smashing a china shop smily when we need one?}

18

U.S. Customs and Border Protection have rules on what counts as country of origin. Vietnam would also be risking WTO and other organizations’ sanctions if they were to engage in some kind of large-scale fraud.

Just to add though, that it’s not necessarily a case of “strongarming” so much as modern supply chains. A lot of goods assembled in Vietnam include Chinese parts. What percentage Chinese parts is too much? Just one more reason that tariffs are silly IMHO.

19

20-ish years ago a friend of mine worked for a major US manufacturer with plants in the US, Canada, and Mexico. NAFTA was in effect at that time.

Her whole job was to sort out what was the best way to make this or that part or subassembly in which of those three countries and when to ship the partly completed good across a border to save on taxes. Of course properly labeling what the item was had a lot to do with how much it was taxed. Inaccurate labeling, mostly in the direction of less specificity, could undo all the savings from shipping half-completed stuff back and forth 10 times on the way to a finished product supposedly “made in the USA.”

She was part of a department of many, many people engaged in this work. it’s complicated. But they were a huge profit center for their employer versus the naïve “make it as much as possible in the lowest wage place and pay whatever taxes they charge to sell it here.”

20

Selling land to settlers was a significant source of revenue in the 19th century, though it was obviously unsustainable, and it’s often forgotten about.