Tariffs

Donald Trump is still threatening to put "steep" tariffs on imports from China and Mexico. I think that many Americans misunderstand how tariffs work. China and Mexico will not pay these tariffs. Americans will pay the tariffs. 

A tariff is a tax on imported goods that is paid by the importer. The importer resells the goods on the American market. The imported goods become more expensive for the American company to purchase. Therefore, those goods must be sold at a higher price to recover the cost of the tariff. But because the American people are usually the ultimate buyer and user of the imported items, it is the American people who will ultimately bear the cost of the import duty.

In other words, if potatoes cost more to buy from a foreign potato grower, then those potatoes will cost more in the American grocery store.

Let's say you run a company in America that builds motorcycles. You want to buy the engines from a company in China that makes a very good engine that is cheaper than the engine you could buy from an American company. To keep your selling price low, you buy the engine from this Chinese company. Suppose the engine costs $1000. Then the U.S. government imposes a 100 percent tariff on that engine. Now you, the importer, have to pay $2000 for each engine. A thousand dollars goes to the Chinese manufacturer and another thousand dollars goes to U.S. Customs for the import duty.

Americans buy a lot of things that are made in China and Mexico. If Trump applies a 50% or 100% tariff to those imports, a lot of things Americans buy are going to cost a lot more.