Former President Donald Trump on Tuesday was interviewed by Bloomberg at the Economic Club of Chicago, where he once again touted historic tariffs as a way to grow America’s manufacturing sector by making foreign countries foot the bill.
But, given the economy’s central importance in the 2024 race, it’s worth hammering on an Econ 101 fact: Tariffs are a tax on Americans.
Trouble is, a lot of people don’t seem to get this — including Trump, who, CNN has reported, has falsely and repeatedly claimed that China would pay for tariffs he imposes.
It’s just not how trade works — not now, not ever.
Very simply: When the US government decides to put a tariff (read: tax) on, say, Chinese goods, the actual money going to the US Treasury comes from the American company doing the importing. And for that company to stay in business, it needs to make up that cost somewhere else, and that typically means raising prices on its consumers.
How tariffs work
To illustrate how tariffs affect American businesses and consumers, imagine this scenario involving a fictitious, foreign shoe manufacturer called Worldwide Shoes.
Foreign manufacturer produces goods to be sold in the US
Worldwide Shoes produces a variety of sneakers, dress shoes and sandals outside of the US.
Shoes are shipped to the US, where they face a tariff
The US places a 20% tariff on each pair of shoes.
Companies based in the US pay the tariff to the US Treasury
US Sneakers, an American company that purchases from Worldwide Shoes, pays for the total cost of the imported shoes plus the tariff. A $100 pair of shoes now costs US Sneakers $120.
The US company has a few options to make up for this increased cost.
1
2
3
Company eats the cost of the tariff
Company passes along some of the cost of the tariff to the buyer
Company passes along the cost of the tariff to the buyer
US Sneakers
decides to keep
the price it
charges for its
shoes the same.
The company is
making a smaller
profit and may
have less money
to pay its
workers or invest
in expansion, for
example.
US Sneakers raises the price of the shoes by $20 to make up for what it paid for the tariff.
US Sneakers raises the price of the shoes by $10, covering half of the cost of the $20 tariff.
American consumer pays a higher price
On store shelves, the shoes cost up to $20 more than they did before the tariff was put in place.
