Who Pays Tariffs Anyway?

I know what you’re thinking: who actually pays a tariff?

No need to be embarrassed. The UK’s trade debate would be of a markedly higher quality if more people dared ask this one question. There would be fewer statements along the lines of “well if we were to both put up tariffs, they’d end up having to pay us more for access because they sell us more” for one. 

There’s a simple answer, but it comes with caveats:

Importers pay import tariffs. (And when people talking about tariffs they are usually talking about import tariffs; export tariffs are rare.)

If, for example, I was to import something that incurs a 10% tariff, I would need to pay HMRC 10% of its value in order to get it released into my possession. To reiterate: tariffs are taxes on importers, paid to the customs authority of the country imposing the tariff (EU member states then pass it to the EU after taking a cut to cover admin costs). Tariffs are a border-tax on the buyer, not the seller; they make it more expensive for the buyer to import a good into the country.

Caveat time.

It is of course possible, through agreement between the importer and exporter, to arrange for the exporter to pay the tariff, which sometimes happens. (There is even an internationally recognised term for such an agreement: DDP – Delivery Duty Paid.) In the context of Brexit, I have also heard, anecdotally, of UK exporters signing contracts with EU27 buyers stipulating that if a new tariff were to be imposed on the goods being exported into the EU27 from the UK, the additional cost will be covered by the UK exporter. However, it is important to note that, even in a scenario where the exporter has agreed to pick up the tab, the tariff still gets paid to the country hosting the importer.

There is then the bigger question of who really pays when a tariff is levied on an import. By this I do not mean who literally pays it (again, the importer) but instead who ends up out of pocket once all transactions are complete.

For the most part, an increase in cost, such as one caused by the imposition of a new tariff, is passed onto the final buyer, otherwise known as you and I. For example, if I have a penchant for designer Italian handbags, but they suddenly have a 15% tariff slapped on them, I’m probably not going to buy a cheaper Chinese knock-off instead. The exporter can be quite confident that a 15% tariff will not have a big impact on their market share in the UK, and consumers like me will simply pay the higher price.

Yet, this is not always the case.

Let’s say I currently eat Dutch mackerel. I eat Dutch mackerel not out of any particular preference, but instead because it is the mackerel found on the shelf of my local Tesco Metro. I go to the Tesco Metro to buy my mackerel because it’s cheaper than going to the fishmonger next door. If a 20% tariff was levied on imported Dutch mackerel, there’s no way Tesco Metro would want to pass that onto the consumer as their consumers (me) are particularly price sensitive. What if I started going to the fishmonger next door instead? Ultimately, it is not that difficult for Tesco Metro to substitute Dutch mackerel for now relatively cheaper Scottish mackerel.

The Dutch mackerel exporter is faced with a choice: either it does nothing and sees its UK market share disappear as supermarkets stop buying its now expensive product, or it lowers its prices to compensate for the 20% tariff now faced by UK buyers. Assuming it does the latter, the Dutch mackerel exporter will ultimately lose out and its profit margin will take a hit, not the importer, nor the final consumer.

So who ends up worse off when a tariff is imposed? It depends. More often than not it is the final consumer, but the additional cost may be split to varying degrees between all of the actors involved.

Regardless, if a tariff is levied it gets paid by the importer.*

*subject to terms and conditions

Samuel Lowe

@SamuelMarcLowe

5 comments

  1. Worth making the point perhaps that tariff is paid relative to the cost of the item to the importer, not the final retail price, so in your mackerel example, presumably final pass through to the consumer would be much less than 20%.

    Liked by 1 person

  2. What the question should be is not who pays – but who receives……
    In reality – the Treasury would gain massively – that means public services, schools, education, hospitals will gain massively.

    In reality – as a country we will import far less from the EU, and in time either end up making it here or importing it from developing countries – the UK jobs market gains massively, developing countries gain massively.

    Now please describe how the EU commission and Merkel will do – when Bavaria starts to shed jobs – she will be crucified.

    Like

  3. The question is always who pays 😉
    Tariffs can easily be sold as protecting home grown business against unfair foreign importers. We can see Trump using the tactic right now, but in the end the real loser is the consumer.
    There is also the argument that Jeremy Cook on the World First blog makes today that “if all of your competitors suddenly become 15% more expensive you can raise your prices by 10% and still retain your advantage.”
    Who’ll end up paying these global tariffs – I believe it’s all of us.

    Like

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