Many people who discuss who actually pays for tariffs claim that they are paid solely by consumers. Even many economists, including co-blogger Pierre Lemieux, say that. But it’s important to look at what people are implicitly assuming when they make that claim.
Here’s what I wrote in “Tariffs Will Hurt Canadians and Americans Alike,” Defining Ideas, December 19, 2024:
Many people who have, like me, been critical of tariffs, have claimed that US consumers bear the whole cost of the tariff. Writing in August 2019, for example, Rachel Layne of CBS News stated, “The fact is, companies here pay tariffs to US Customs and Border Protection when Chinese goods reach America’s shores.” It’s true that Americans write the checks. But one of the first things about taxes that we economists teach undergrads is that knowing who writes the check tells you exactly nothing about who bears the burden of a tax. What determines the split of the burden between producer (exporter) and consumer (importer) is their relative elasticities of supply and demand.
There are two extreme circumstances in which the importers bear the whole burden of the taxes.
The first is if importers have a completely inelastic demand for the good on which the tariff is placed. In such a case, the price gross of tariff rises by the whole amount of the tariff. That necessarily means that the amount bought changes not at all. (You would show that on a graph with a vertical demand curve.) I don’t know anyone who believes that that happens. There is always some elasticity of demand even if it’s only on the order of -0.1 or -0.2.
The second case in which the importer bears the whole burden is if the supply is infinitely elastic. In that case also, the price gross of tariff rises by the whole amount of the tariff. (You would show that on a graph with a horizontal supply curve. That case is shown in the accompanying graph.) This is more plausible than the first case. It would happen, or come close to happening, if the exporters of the good had very good alternatives for selling their product.
Here’s the interesting tension.
If you’ve paid much attention to what’s happening in Canada, as I have, you know that many Canadians are upset about Donald Trump’s threatened tariffs. But if importers bear the whole burden, Canadians shouldn’t be upset at all. If the demand curve for their exports is completely inelastic, then, even with a tariff rate of 25%, they will make the same amount of money selling the same exact number of exported goods as if the tariff rate were the same as it is today, which is typically well below 25%.
If, on the other hand, the supply curve is perfectly elastic, exporters in Canada will not export as much as they did to the United States, but they will sell the same number of goods for the same price net of tariff that they would have earned before the tariff. They might sell them to people in other countries or to people in Canada, but their sales and net revenues will be unaffected.
My reasoning above means that either Canadians are getting upset over nothing, which is possible, or that the burden of a 25% tariff would be split between Canadians and Americans. My inclination is to believe the latter.
I’m quite willing to believe, as I wrote in my earlier mentioned article, that it’s not an even split, specifically that Americans would bear most of the burden. But, as I noted in that article, even if Americans bear 80% of the burden, the large difference in population between Canada and the United States means that the burden per person and per household would be much higher in Canada than in the United States.
Here’s what I wrote about relative burdens in that article:
The $95 billion loss to US consumers would be spread over approximately 340 million people, for a per capita loss of $279. That’s not a large number, but the cost to the average household (which has 2.5 people) would be $699.
The $23.75 billion loss to Canada would be spread over approximately 41 million Canadians, for a per capita loss of $579 and a per household loss (the average household size in Canada is also 2.5) of $1,448.
READER COMMENTS
Matthias
Feb 19 2025 at 5:36pm
If you have a million percent tariff, no one will ‘pay’ anything at all, because they just won’t trade, but you would still destroy consumer and producer surplus.
And that’s partially true for lesser tariffs as well, that reduce traded volumes less, I suspect?
David Henderson
Feb 19 2025 at 6:09pm
I was analyzing a 25% tariff.
Scott Sumner
Feb 19 2025 at 5:38pm
Good post, but a few additional points. Some of the “upset” reflects the deadweight loss from tariffs, not the tax incidence. Thus a tariff that raises $10 million may impose more than $10 million in losses on domestic consumers, even if exporters bear some of the burden.
In my view, a significant portion of the short run effects falls on exporters, whereas the long run effect is almost all on importers. I also believe that it’s the long run effect that we should focus on.
David Henderson
Feb 19 2025 at 6:09pm
You write:
Thanks.
You write:
The deadweight loss is part of the tax incidence. In the case of vertical demand, there’s no DWL. In the case of horizontal supply, there is DWL, but it’s all on the importer. So for these tariffs, that would be Americans, not Canadians.
Also, even in the more realistic case where the burdens are split, the DWLs that each side bears are roughly proportional (and maybe more than roughly–I haven’t worked it out) to the amount of tax borne.
You write:
If that’s true, then that’s additional reason for Canadians not to be so concerned.
Craig
Feb 20 2025 at 12:56am
“If that’s true, then that’s additional reason for Canadians not to be so concerned.”
Well, in theory doesn’t that mean the Canadians have been leaving a 25% price hike on the table?
David Henderson
Feb 20 2025 at 10:24am
No. I’m so tempted to explain why, but I’ll leave this as an exercise for you or other readers. I will give a hint: it has to do with competition.
Da Hath
Feb 19 2025 at 6:46pm
The economic analysis here is excellent. It is irrelevant in this case. This is beyond calculating the economic cost. Canadians are upset is because they have been taken advantage of and are vulnerable. Canadians just negotiated a trade deal with Trump a few years ago, now he’s tearing up his own deal. He is threatening Canada’s sovereignty, after Canadians acted in good faith as a good neighbor. Stephen Harper, a fine former Conservative Prime Minister said he would “impoverish the country” to fight threats to our country. Don’t be surprised if Canada re-instates it’s iced nuclear program. It wasn’t a lack of capability that stopped Canada, it was the great neighborhood.
David Henderson
Feb 20 2025 at 10:23am
You write:
Thanks.
You write:
You may be right. One difficulty is that when you have a politician or former politician speaking for the whole country, you don’t know what people think on their own. I have talked to one particular Canadian who is quite worried about the tariffs for their economic effects.
Mactoul
Feb 20 2025 at 11:40pm
Stephen Harper is probably thinking of the offer or threat to annex Canada, not of tariff primarily.
One should suppose it a good offer to merge the two English-speaking liberal countries. Isn’t it a privilege to be a part of USA? I wonder how many non-political Canadians are offended by the offer.
David Henderson
Feb 21 2025 at 7:39pm
It would be interesting to know more about the context in which Harper spoke.
You write:
I bet under 20% of Canadians are offended if they think it’s just an offer. But if they think there’s an implicit threat, I would bet that over 80% of Canadians are offended.
Craig
Feb 19 2025 at 8:19pm
Pondering tariffs, I’m not entirely what I would do sell side but at least initially, and temporarily, I will eat the tariff to the extent practical, in the hopes it will all just blow over quickly enough.
Kurt Schuler
Feb 20 2025 at 5:34pm
In the short and medium runs one can say that producers typically bear some of the cost of tariffs. In the long run the cost all falls on consumers, either directly as higher prices or indirectly as lower consumption or quality than would otherwise be the case. As the Austrian School of economics has stressed, ultimately, all economic activity traces back to consumers.
Comments are closed.