Thursday, 3 August 2017

Who bears the burden of tariffs?

The debate raged somewhat inconclusively in the comments to yesterday's post.

Short answer is, nobody really knows - is it the exporter in the other country (who has to accept lower net selling prices) or is it the consumer in the importing country (who has to pay higher gross selling prices) or some combination of both? Similarly, tariffs must lead to a lower volume of trade, which doesn't just hurt the exporter and the consumer but has bad knock-on effects all round (which are nigh impossible to measure).

You can't generalise, except to say that a tax is borne by the less elastic factor - supplier or consumer. So domestic VAT is almost entirely borne by the supplier. I can choose whether to spend my hard-earned on taking the family to a local restaurant for a meal, or to the local cinema to see a film (so demand for either is highly elastic); the local cinema owner can't just turn off his screens and start serving meals and vice versa (inelastic).

(It puzzles me that the protectionists get so het up about WTO "standard tariffs" which average around 5% while ignoring the immensely more damaging effects of our domestic tariff (VAT) which is 20%, but hey.)

A factory in China bashing out TV sets for sale world-wide has, from its point of view, more or less infinite demand. If one or the other country puts a tariff on Chinese TV sets, well what do they care? The tariff is borne by the consumer in the importing country (especially if there are no domestic TV manufacturers). If volumes drop, the Chinese TV factory will switch to making radios or hair dryers or something else which suffers lower tariffs or which they can sell to non-tariff countries.

Compare that with tobacco companies. Demand is price inelastic (addictive), suppliers supply internationally so supply is elastic. Tobacco duties are passed on more or less 100% to the consumer, the domestic government collects it and producers (domestic or foreign) aren't really affected at all (barring from the small reduction in volumes).

Then we get to comparative advantage, which brings a third party into the mix - the domestic producer who is at a small cost disadvantage. If the tariff on the cheaper foreign product is larger then the cost difference, the cost is borne by consumer (higher price) and foreign producer (lower volume); a large part of the benefit of the tariff goes to the domestic producer (higher price and lower volume).

And so on.


James James said...

You might enjoy this, by Tino Sanandaji, a very clever chap:

He comes to the same conclusions as you: "Ramsey’s principle of optimal taxationdictates that we should tax activities proportional to tax sensitiveness. Different economic activities differ in price sensitiveness. For instance taxing land has a very small effect of supply whereas taxing foreign capital can substantially reduce supply...

Households cannot themselves build high-tech goods such as electronics or vehicles regardless of how high the sales tax is, but can easily produce close substitutes for many services, such as transportation or eating out. Because of this taxes on services can reduce labor supply more than taxes on goods."

He also has this interesting idea: "In a welfare state the social cost of unemployment for low-skill workers is higher than the social cost of unemployment for high-skill workers. Therefore it may makes sense (“second-best”) to tax goods and services produced by low-skill workers."

Mark Wadsworth said...

JJ, the post 2008 emergency vat cuts "worked" very well. Your explanation is as good as any.

The last para doesn't make sense though.

Mark Wadsworth said...

JJ, I know it's a direct quote, but surely it makes more sense to tax high skilled workers (if his assumption about social costs are correct}??

Dinero said...
This comment has been removed by the author.
Dinero said...

My observation is that who bears the cost of tariffs is not actually relevant to the scrutiny of the unqualified statement in the linked article "UNIlateral free trade is good." Whatever factors are involved in establishing the price, the tariff must reduce the income on the exporter and thus cause a problem for their balance of trade account. If the consumer bears the cost in the tariff country then the consumers in the non tariff country will not be, and thus they will be more inclined to buy more imports, Or if the exporters bears the cost then their revenue will be lower for the same trading, and the non tariff county will be having the net flow out on the account. All else being equal. Not a political analysis , only accounting.

Contact YPP said...

Din: "the tariff must reduce the income on the exporter"

Maybe, maybe not. Depends what the recipient of tariff (the government) spends it on. In pure accounting terms, why is this source of revenue any different to taxing domestic income? You could argue that any domestic tax reduces the amount that people can spend on imports.

Forget this whole cross border thing, tariffs and VAT (and sales or turnover taxes) are the worst taxes - unless you genuinely want to reduce quantity consumed (i.e. with fuel duty - that's a good tax).

Dinero said...

It reduces the income to the exporter because the exporter country is not the country that is the recipient of the spending of the government that levies the tax.

Derek said...

Well said, Mark. It's basically all down to tax incidence. Except in this case that the tax is a tariff. And that means that you have to look at the products in detail. If the government just imposes a blanket tariff on all imported goods and services, some of those tariffs will be paid by the foreign manufacturer; most will be split between domestic consumer and foreign manufacturer; and some will be paid by the domestic consumer. It's only possible to build up a full picture of who pays how much by doing a detailed analysis of all imports along the lines of the examples that you described.

But why bother when we already have the "internal tariff" of VAT putting up a trade barrier between domestic producers and domestic consumers? That's where the easy pickings lie. Abolish VAT and the beneficial effect will go a long way to compensating for the extra costs caused by the loss of free trade with the EU!

Lola said...

This is quite a good article on the whole free trade / tariffs thing:-

DBC Reed said...

Try "Trade with China destroys American jobs.." in Huffington Post 2011.This asserts that Chinese invested export profits in American real estate causing world wide crash. Also good for foreign trade causing land speculation at home :' The Deserted Village' by Oliver Goldsmith (1770)

Lola said...

DBCR. I think that the China/US thing has more to do with bad money than anything else. Under the current fiat money settlement the automatic 'specie flow' regulator (that traditionally existed under a metallic standard) is not available and the fiat currency is undermined by central bank and commercial bank mis-regulation enabled credit expansion. China has ended up with Trillions of USD essentially printed to buy Chinese stuff that are essentially worthless unless they can be recycled into land rents (all IMHO obviously, and up for debate).

DBC Reed said...

Trump was always saying that the Chinese were engaging in currency manipulation with the yuan, artificially lowering its value to make Chinese goods for export cheaper. He gave it a rest for a while because he was trying to induce Chinese to get tough with North Korea. This having evidently failed, he's gone back to whining about currency manipulation, which I suppose the Chinese can do readily as they make no bones about there being a big State owned magic money tree.(How unlike our own dear country where all loans are financed entirely from bank customers accounts !)Currency manipulation is an inbuilt weakness in the Free Trade fantasy, at least of the free, free as the air type of a come-one-
come-all level of inclusivity. But that is your problem: I line up with the Commonwealth post 1932 system (one currency) and the original EEC system ( a few countries with comparable wage levels).
BTW if foreign states have invested so much in real estate, such as in London, a lot of the resistance to LVT can be accounted for as coming from outside pressure.
From a highly suspect source: "A home market of 300 million people will be large enough for all requirements of industry , as well as being secure from dumping ,under-cutting ,cheap labour competition etc."