Opponents argue tariffs generate tensions with trading partners and hurt consumers by driving up the cost of imports. Proponents counter they can be necessary to pressure countries to play fair on trade. What is certain is their effects are complicated and undoubtedly impact you and your business.
Tariffs are a source of revenue for the nation’s treasury. But they also operate as a tax on goods. And there are many complications with their imposition and administration.
(Editor’s note: This is part 1 of a two-part column examining how tariffs may affect your business. See part 2 here.)
Under Title 19 of the Code of Federal Regulations, tariffs are imposed on importers and are remitted by them to U.S. Customs and Border Protection. For instance, a U.S. importer of Chinese goods must remit import duties to U.S. Customs. The tariff is not levied against the Chinese exporter.
To remain price competitive, the exporter could decide to lower the selling price for its exports in order to offset the importer’s added tax costs, so the ultimate consumer price remains unaffected. This is seldom the case, however.
The real economic cost of an import tax is … borne by the consumer.
Without a price concession from the exporter, the importer must either absorb the cost of the import tax or pass it on to the consumer. The importer most often chooses the latter. This increase could appear in a couple of different ways. The first path is the more obvious, in that the price of a good or raw material is increased by the price of the tariff. In the other, less-obvious path, importers look for alternative materials or goods – including from domestic sources – that may be more expensive, inferior in quality, or both.
As can be seen in either case, the real economic cost of an import tax is ultimately borne by the consumer. In fact, one study concluded the 2018 tariffs cost each American an average of $213 over the first nine months of 2018. Extrapolated over the full year, this totals approximately $86 billion of increased costs to American consumers. For comparison, individuals received an estimated $75 billion tax cut in 2018 based on the first projection of the revenue effect of the federal tax reform passed in 2017. Thus, the economic costs of the 2018 tariffs more than offset the individual tax cuts.
The administration of import taxes is often likened to that of a sales tax. Generally, a sales tax is based upon the price, or value, of the item and is thus an ad valorem tax. Also, sales taxes are broadly applicable and levied at varying tax rates that depend on the product category. But the comparison between an import tax and a sales tax understates the complexity inherent in the tariff system.
There are four different ways of applying a tariff to an item, and only one of these is value-based. Furthermore, there are approximately 13,500 possible rates that can apply depending on the nature of the item and the country that it is coming from.
Rates are not the only complicating factor. For industrial tariffs alone, the Office of the United States Trade Representative dictates there are approximately 5,000 different commodity groups. These commodity groups break down into 11,000 subgroups and these subgroups break down into nearly 20,000 smaller subgroups. U.S. Customs and Border Protection has this to say about the level of complexity: Experts spend years learning how to properly classify an item in order to determine its correct duty rate. For instance, you might want to know the rate of duty of a wool suit. A classification specialist will need to know, does it have darts? Did the wool come from Israel or another country that qualifies for duty-free treatment for certain of its products? Where was the suit assembled, does it have any synthetic fibers in the lining? It is solely the responsibility of the importer to ensure the item is properly classified.
Barret Pinto is a director in the Tax Group at CBIZ & MHM New England, with offices in Providence and Boston.
