Paying for Tarifs

Manufacturers need to sell their products to stay in business.  Products that are essentially equal compete based on price.  Tariffs on a particular nation increase the price of that nations product.  If the tariff increases the price higher than its competition it won't get sold.  Manufacturers will reduce the price if at all possible to sell it.  It should be noted that the replacement item, is by definition more expensive than the original item, costing the buyers more.

The sentence above is a simplistic explanation as to who pays for tariffs.  What should be noted is that its always paid either fully or partially by the buyer, but the manufacturer or producer may lose profits.

In a simple example take an item that sells for $100.  First, the tariff is applied on the value of the imported item, not the final sale price.  So say that item when imported costs the importer $50 (the rest of the price includes the sellers costs and profit).  If it is hit with a 25% tariff the tariff would be $12.50.  If passed along completely to the consumer it would result in a final price of $112.50, not $125.

Now if a product is available that can be sold for less than $112.50 it will get more sales.  Assume the replacement product costs $105.  In that cast the manufacturer either reduces his price so he can match that price or accepts less sales.  In our example, and I apologize for the math, the $6250 of the imported item would have to be reduced to no more than $55 all things being equal.  With a 25% tariff, the price of the imported item would have to be reduced to $44.  So to stay competitive the manufacturer would absorb $6 in costs which could be viewed as paying part of the tariff.  However the tariff instead of being $12.50 is now $11 which is still passed on to the consumer, even thought the ultimate price increase was only $5.

In many scenarios the actual outcome is that the competitor sees and opportunity to raise its price from the $105 price point to say $110, make more profit and still capture more market share.

For all of you non-math lovers, the simple answer is that tariffs cause higher prices which consumers pay.  It may impact the place of manufacture or it may not, but it impacts our wallets.