How Tariffs Work, and Why China Won’t See a Bill

President Donald Trump frequently promotes the idea that when the United States places a tariff on an import from another country, that other country directly pays the bill.

He’s wrong, but he keeps saying it.

“Billions of dollars will soon be pouring into our Treasury from taxes that China is paying for us,” Trump said during a news conference earlier this month.

On Thursday, he wrote something similar on Twitter: “Billions of Dollars are pouring into the coffers of the U.S.A. because of the Tariffs being charged to China, and there is a long way to go. If companies don’t want to pay Tariffs, build in the U.S.A. Otherwise, lets just make our Country richer than ever before!”

That tweet raises a question. Are the tariffs being charged to China, or to companies? It’s a good starting point for a sort of FAQ on tariffs that could be useful for executives, voters, even presidents. (For explanatory purposes, The New York Times is supplying both the questions and the answers below.)

A: Neither of them, technically speaking. When the United States puts a tariff on a Chinese import, it does not send a bill to China. If a U.S. company manufactures a good elsewhere and it is subjected to a tariff, the company doesn’t typically get a bill from the government, either.

A: Usually a middleman, to start. Most U.S. companies that bring products in from abroad do not handle the paperwork themselves. They hire what’s known as an importer of record — someone whose job it is to navigate the intricacies of the U.S. Customs and Border Protection’s system for inspecting imports and levying any duties on them. (Duties are a tax or fee placed on an import. Tariffs are a form of duty.)

When an imported good enters a port in the United States, the importer of record initially gets the bill for the tariff.

A: Not usually. This is where the question of who pays tariffs gets trickier — because middlemen tend to pass on their costs.

A company that contracts with an importer will almost always see the costs of that contract rise after a tariff has been imposed on goods it imports. So now the company is paying, say, 10 or 25 percent more to bring in the exact same product it imported before the tariffs. The company faces a choice: What should it do about those extra costs?

A: The company could pass on the added costs to consumers, in the form of higher prices. That’s the simplest route, particularly in a competitive market where the supply chain is not easily moved. (Washing machines are a good example of this. Their prices rose in the United States earlier this year after Trump’s administration imposed tariffs on them.)

Companies can also try to minimize tariffs by switching suppliers or changing the products they sell. In the case of China tariffs, that could mean moving a factory from Beijing to Vietnam. In this case, no one pays the tariffs; the company is making an end-run around them.

Some companies may choose to absorb the extra costs themselves, by accepting lower profits. They choose neither to raise prices nor immediately pay to shift production, based on the idea that the most economically efficient price to charge for the product is not changed by the existence of tariffs. That could be the case with Apple: It can charge such a premium for iPhones that it might decide to accept smaller profit margins on them for a while, if they become subject to tariffs.

A: It never does, directly. But there are certainly ways that U.S. tariffs hurt China. If companies move production to Vietnam, China would see less economic growth — although that itself is not a direct benefit for U.S. production, and in the short term would be a headache for companies that have to find new factories.

Another way China could lose: Americans may buy fewer Chinese goods as the prices rise. That’s a loss for China, but it’s also a tax on Americans who buy things.

The U.S. government is not “charging” China or the American people. But Americans are paying the costs anyway.