The Definition of Tariffs: Let’s Get This Right

The weapon of choice for the Trump Administration’s multi-front war on international trade is tariffs on certain goods produced by U.S.A. trade partner countries that the President claims have cost American jobs or, even, implausibly, threaten America’s national security. The words used in international trade are, to say the least, unfamiliar to the general public; some of them are arcane even to veteran trade practitioners. The term “tariff” is one of them.

To help their audience, the media covering the moment-to-moment drama of Trump’s trade wars have attempted to provide a definition of tariff. Most get it mostly right, but in these times of misinformation and lack of clarity and specificity, intentional or innocent, it is essential to get the definitions of trade terms, such as “tariff”, exactly right. Unless those affected or even potentially affected by international trade (and there seem to be very few anywhere who aren’t) have a clear, precise understanding of the words being used, they will not know how to react appropriately.

For example, a video published by Canada’s Globe and Mail, in connection with their otherwise excellent and comprehensive coverage of the NAFTA renegotiations and the increasing friction in trade and political relations between Canada and the USA (See “Risk of Trade War Continues to Rise”), correctly said that tariffs are fees, similar to taxes, imposed by a government on goods produced in a foreign country, but incorrectly said that those tariffs were paid by the foreign producer. Tariffs, also known as import or Customs duties, are paid by the importer, usually the purchaser, of the foreign goods when those goods arrive in the importing country; they are not paid or payable by the foreign producer. (In fact, at least in the USA, it is illegal for a foreign producer to reimburse its importer-customer for certain types of tariffs, such as Anti-Dumping and Countervailing Duties.)

Who will actually and literally pay the price of the tariffs Trump has imposed or threatened to impose apparently has not been widely understood. For example, in a recent op-ed in Crain’s Detroit Business, the CEO of Lucerne International expressed surprise and alarm that the tariffs “her” President wanted to impose on Chinese metal products (comprising the entirety of her product line sold in the US) would be paid by her company, adding an uncompetitive and potentially crippling cost.

So, let’s be clear: tariffs are essentially taxes imposed by the government of an importing country on foreign goods. Tariffs are paid by the importer of those goods, not by the foreign producer or the foreign government. Even if the purpose of the tariffs is to change the conduct or policies of the foreign producer or government, that change will only be affected by the changed behavior of the importer or the importer’s customers, assuming that the importer or the ultimate consumers can or want to change their purchases of the target foreign goods.

Comments are closed.