By Rainey Lin
Research Intern, McNair Center for Entrepreneurship and Economic Growth
Section 232 of the Trade Expansion Act of 1962 and Section 301 of the Trade Act of 1974 allow the President of the United States to impose tariffs against foreign nations due to national security concerns and unfair trading practices, respectively. Under these authorizations, the United States imposed steel and aluminum tariffs against foreign nations in March 2018, followed by an additional round of tariffs against China in June 2018. Since then, the United States and China have levied additional tariffs on goods including industrial equipment, furniture, electronics, and a plethora of other commodities. In total, the U.S. tariffs coupled with retaliatory Chinese tariffs affect over $630 billion of traded goods each year.
Economists are largely in agreement that the cost of these U.S. tariffs is paid more by American importers than by Chinese exporters. Yet economic analyses of these recently imposed tariffs have centered mostly on the effects on U.S. consumers — including rising consumer prices, inflation, and depressed consumer demand. Less attention has been given to the effects on small businesses, retailers, and manufacturers that may be unwilling or unable to pass costs onto consumers. This article examines the tax incidence — that is, the division of burden between consumers and producers — of the latest U.S. tariffs against China.
The burden of tariffs on retailers
A preliminary analysis by economists at Harvard University and the International Monetary Fund analyzed U.S. import prices on steel and other Chinese goods subjected to U.S. tariffs beginning in 2018. The researchers then collected online pricing data from retailers to compare individual price changes for affected goods against unaffected goods and concluded that “much of the price impact is absorbed by retailers who earn lower profit margins,” suggesting that consumer prices may not rise as much as initially anticipated. However, this study only examined data up until April 2019. More recent estimates suggest that the recent U.S. tariffs could cost the average American household up to $1,000 a year in price increases.
The tax burden distribution is likely to vary depending on the specific industry, classification of affected good, and size of the manufacturer, retailer, or business. For example, the Harvard and IMF economists found that higher costs are “passed through to consumers for some goods, such as washing machines, but absorbed by lower retailer profit margins for others.” To further complicate the issue, some retailers may raise general prices of all goods, including those unaffected by tariffs, to compensate for increased costs, making it difficult to attribute causal effects to the latest rounds of tariffs.
However, some retailers across the country have already expressed fear that raising prices may cause dramatic decreases in sales and cripple their businesses. According to a report from Coresight Research, U.S. store closures through August 2019 have already exceeded store closures for the entirety of 2018, with chains including Walgreens, Office Depot, Gap, and Lowe’s cumulatively closing hundreds of stores nationwide. While many factors underlie this trend, the impact of tariffs is heightened by the fact that recent tariffs particularly hit retailers that have narrow profit margins or rely on imported goods, including electronics, clothing, and consumer goods such as bicycles.
These concerns highlight the dilemma that many smaller enterprises face. While these firms may not have the financial resiliency to absorb the upfront costs of tariffs, the threat of dwindling sales makes it difficult to pass those costs onto consumers. Ultimately, the escalating trade war with China may further contribute to store closures, job losses, and bankruptcies in the already troubled retail industry.
Effects on Texas business
Over 3 million jobs are supported by global trade in Texas, where $10 billion in state exports are targeted for retaliation by China. According to Tariffs Hurt the Heartland, a pro-trade group, the trade war and tariffs against China have already cost Texas producers and consumers $3.4 billion. While producers of cotton, sorghum, and other agricultural products are particularly vulnerable, the automobile, furniture, technology, and even energy industries in Texas are all at risk, and many small businesses and manufacturers are already concerned about the economic situation.
The recent Texas Manufacturing Outlook Survey, conducted by the Federal Reserve Bank of Dallas in August 2019, reports that the manufacturing outlook across the state remains mostly positive, with over 30% of firms expressing that they had received more new orders in August than in June. But despite this positive trend, concerns over tariffs cloud the economic outlook. Firms continue to express concerns over the escalating trade war, with emphasis on the increased costs of steel and aluminum.
Notably, some manufacturers in Texas are discovering that their customers are refusing the upcharge on products made from steel and aluminum, while other manufacturers have had no choice but to raise prices. The general scene is marked by confusion and uncertainty as manufacturers scramble to find solutions. For example, in the furniture industry (in which Houston is home to some of the nation’s largest suppliers), domestic manufacturers were able last year to absorb the cost of a 10 percent percent tariff on steel and aluminum components. But in the face of recent tariff increases, many doubt that they will be able to avoid raising prices. Other manufacturers who fear sales losses are looking for alternatives including pausing orders from China, rerouting sourcing, and discussing ways to minimize costs.
As America’s trade war with China continues into the end of 2019, retailers and small businesses across the country face a difficult choice of either trying to absorb costs themselves or raising prices and risking sales losses. While Texas manufacturers are continuing to see new orders placed and enjoying healthy profits, the looming threat of escalating tariffs and retaliatory measures remains a source of concern for the state’s economic outlook. For small firms who may lack the financial and legal resources of larger businesses to circumvent or absorb the costs of tariffs, the economic situation is particularly perilous. Only time will tell precisely how much of those costs they can bear.
Brock R. Williams et al., “Trump Administration Tariff Actions (Sections 201, 232, and 301): Frequently Asked Questions,” Congressional Research Service Report R45529, February 22, 2019, p. 55, https://crsreports.congress.gov. The Section 232 action imposed a 10% tariff on selected aluminum imports and a 25% tariff on selected steel imports from most countries, effective March 23, 2018. The Section 301 action, effective July 6, 2018, imposed an immediate 25% tariff on over 1000 products from China, and an immediate 10% tariff (scheduled to rise to 25%) on over 5000 other products from China. Ibid. at p. 2.
Chad Brown and Melina Kolb, “Trump’s Trade War Timeline: An Up-to-Date Guide,” Peterson Institution for International Economics, September 20, 2019, https://www.piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide
 Jacqueline Varas, “The Total Cost of Trump’s Tariffs,” American Action Forum, September 26, 2019, https://www.americanactionforum.org/research/the-total-cost-of-trumps-new-tariffs/
Art Carden, “1,100+ Economists: No Trump Tariffs,” Forbes, May 4, 2018, https://www.forbes.com/sites/artcarden/2018/05/04/1100-economists-no-trump-tariffs/; see also Rajesh Singh. “Explainer: Trump’s China Tariffs – Paid by U.S. Importers, Not by China.” Reuters, accessed September 28, 2019. https://www.reuters.com/article/us-usa-trade-china-tariffs-explainer/explainer-trumps-china-tariffs-paid-by-u-s-importers-not-by-china-idUSKCN1UR5YZ
Alberto Cavallo, Gita Gopinath, Brent Neiman, and Jenny Tang. “Tariff Passthrough at the Border and at the Store: Evidence from U.S. Trade Policy,” Harvard Business School Mimeo (Preliminary), June 2019, https://www.hbs.edu/faculty/Pages/item.aspx?num=57028
Jessica Dickler, “How Trump’s China Tariffs Will Impact Prices for Consumers,” August 31, 2019, https://www.cnbc.com/2019/08/31/what-you-should-buy-on-labor-day-as-trade-tensions-heat-up.html
Cavallo et al., “Tariff Passthrough at the Border and at the Store: Evidence from U.S. Trade Policy”, supra n.5.
“Weekly US and UK Store Openings and Closures Tracker 2019, Week 32,” Coresight Research, August 9, 2019, https://coresight.com/research/weekly-us-and-uk-store-openings-and-closures-tracker-2019-week-32/
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Tom Benning, “‘Final Nail’ in the Coffin? Trump’s New Tariff Ante on China Will Hammer Texas Businesses and Consumers,” Dallas Morning News, August 30, 2019, https://www.dallasnews.com/news/politics/2019/08/30/final-nail-in-the-coffin-trumps-new-tariff-ante-on-china-will-hammer-texas-businesses-and-consumers/
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