by Spencer P Morrison, NEE
The big reason why so many Americans oppose tariffs is because they don’t understand them. They think tariffs are just another sales tax, and assume that imposing a 10 percent tariff on a product will increase said product’s price by 10 percent. That’s not how this works.
Unlike sales taxes, American tariffs are not applied to a product’s retail price, nor are they applied to the wholesale price. In fact, they’re often not even levied on the entire import price. Instead, tariffs are levied on the first sale price—the price paid to foreign vendors by American companies or their middlemen.
This method of calculation reduces the tax burden on American consumers, but preserves the tariff’s punitive effect on foreign producers.
For example, pretend President Trump imposes a 10 percent tariff on all Chinese toasters.
Black & Decker makes toasters in China. These toasters sell for $60 in American stores. This is their retail price. Are tariffs imposed on retail prices? No. This means that the price of toasters will not rise by 10 percent—$66 toasters are a media-concocted boogeyman.
So just how much will this hypothetical tariff increase the price of toasters?
American stores buy their toasters from Chinese manufacturers. But because of China’s (intentionally) convoluted regulatory framework, they often buy them via middlemen located in Hong Kong, Singapore, or Taiwan. These middlemen charge somewhere in the neighborhood of $14 per toaster.
And of course these middlemen don’t work for free: they buy the toasters directly from Chinese factories for $7 per toaster. This is the first sale price, and tariffs are calculated on this figure. Thus the tariff charged on a Black & Decker toaster that retails for $60 works out to just 70¢.
American consumers don’t pay 10 percent more for toasters—they pay just 1.15 percent more. And that’s assuming Black & Decker doesn’t simply source its toasters from one of China’s competitors, in which case consumers may not see any prices increase whatsoever.
This same rule applies to component pieces, meaning that toasters assembled elsewhere using Chinese parts will only increase in price relative to their proportion of Chinese origin. For example, if a Taiwanese factory assembles $7 toasters using foreign parts, half of which are from China, then tariffs will apply to only half of the value. The final retail price of this hypothetical Taiwanese toaster will increase by just over half of one percent
Americans consumers may not notice the tariffs, but Chinese producers will. After all, the only reason Americans manufacture in China is because they’re cheap. If Trump’s tariffs change this fact then American companies will do business elsewhere—hopefully in America. China is vulnerable and Trump knows it.
In this way tariffs give America leverage over China—leverage we can use to achieve important goals. For example, China steals up to $600 billion in American intellectual property yearly. Tariffs could coerce them into enforcing American IP law (which they pledge to do when they joined the World Trade Organization anyways) thereby generating astronomical amounts of cash and upholding the rule of law.