With recent tariff hikes on some Chinese goods, there is some discussion about who exactly pays for these tariffs.  Do Chinese businesses pay for them?  Do American consumers pay for them?  Are they just avoided?

The answer is most likely a partial “yes” to all three of those questions.  In a market economy where some government interference is enacted, we can’t know who pays the higher price.  It is typically a mixed scenario, where costs are borne by several parties.

In the case of tariffs on Chinese goods, there is no question that Chinese suppliers will feel an impact in the form of reduced sales.  They could try to raise their prices, but Americans may turn to other suppliers.  The reason that Americans import so many Chinese products is because it is cost effective.  If that cost advantage goes away, then they might just import goods from another country or make them in the United States.

Tariffs are really just sales taxes on foreign goods.  Therefore, for the rest of this discussion, let’s just focus on taxes in general, and how much they are passed on to other parties.

If there is a tax added to a corporation, it isn’t just one party that ultimately bears the cost of the tax.  The corporation may pay the tax directly.  In the case of a sales tax, it would be the consumer paying directly.  But now we have to look at the indirect impacts.

If a corporation has to pay an additional tax, that money has to come from somewhere.  It could just mean lower profits for the corporation, but this obviously has its limits.  Most businesses aren’t going to keep going for a long time with tiny profit margins, unless you are Amazon where you are selling many millions of dollars every day.

Corporations will pass along these costs if it is possible.  This can impact wages for employees, as that is a way to cut costs.  The business could obviously raise its prices, but only if it will not lose more profit as a result.

Where Some Austrian School Followers Get it Wrong

I find that many followers of the Austrian School of economics get this point wrong. They are taught that the consumer ultimately determines the price of goods.  And while this is true, it leads some people astray.  They get too smart for their own good.

Here is the key point. When businesses are imposed with added costs in the form of regulations or taxes, it doesn’t mean that some of those costs do not flow down to the consumer.

Sure, the consumer ultimately determines the price because they are in control of their own money. If you don’t like the price of something, you are free to walk away.

But this doesn’t mean that prices are not impacted by costs (which doesn’t necessarily have to be just taxes).  This is such an obvious point, yet I see Austro-libertarians making this mistake.

I say it is obvious because you just have to look at the real world.  Gas stations sell gasoline for your car.  Oil is used to make the gasoline.  The gas stations aren’t selling oil directly out of the ground.  Yet, when the worldwide price of oil goes up, we expect gas prices to go up. It makes sense.

Are some Austro-libertarians going to tell me this isn’t the case?  The cost of the inputs for the gasoline went up, and the consumer pays a higher price at the pump.  Why does this happen?

It’s possible consumers may cut back on driving or buy more fuel-efficient vehicles if the price rises enough.  But for the most part, people keep buying gasoline.  They pay the price that is listed at the pump.  So while the consumer is free to walk away and not buy gas for their car, most of them don’t.

So why don’t gas stations just charge more for gas if consumers aren’t willing to walk away? The answer is competition. It’s because the gas station across the street will take away all of your business if you raise prices too high.

But the gas station across the street can’t steel your business by continually lowering prices because there is a limit.  That limit is the cost of selling the gasoline.  A business might be willing to take a loss for a short time to gain new customers, but it is obviously not a sustainable business model to keep selling a product for a loss, unless you are more than gaining in another area.

Therefore, if the price of oil goes up, expect gasoline prices to go up.  If there are additional gasoline taxes imposed, expect the price to go up for the consumer.  If a tariff on oil were enacted, we should expect the same thing.

It is not clear-cut who ends up paying for tariffs or any other taxes and by how much.  We don’t know how exactly everything would have happened in the absence of such a tax.  There are many parties that end up paying, which can include shareholders, employees, and consumers.  Sometimes products that would have been sold just end up not being sold at all. We don’t know how many transactions simply don’t happen because of an added tax or some other cost.

There is no question though that consumers end up paying more because of taxes, which includes tariffs.  The consumer is always free to walk away (unless compelled by the government).  But it doesn’t mean that the consumer won’t pay more for something if there is an added tax on it.