Co-blogger Jon Murphy, in “Why Must Americans Pay Tariffs?” May 29, 2025, points out that U.S. tariffs are largely paid by Americans. He cites the relevant literature.
He then goes on to note that trade occurs between individuals and firms, not countries. This is true and important, but it’s not relevant to the issue of who bears the burden of tariffs.
A tariff is a tax. There’s a straightforward way to assess who bears the burden of a tax: look at the elasticities of demand and supply.
If our elasticity of demand is low and the exporters’ elasticity of supply is high, then we Americans bear most of the burden of the tax. But if our elasticity of demand is high and the exporters’ elasticity of supply is low, then the exporters bear most of the burden of the tax.
Here’s what I wrote on that issue 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.
Consider Canadian oil. On the one hand, many Americans in the Midwestern states depend upon oil from Canada. In response to the tariff, though, they will probably have oil shipped by train from other parts of the United States. That’s expensive, but it is a way to adjust. But Canadian oil producers have few alternative customers to sell to besides Americans. This lack of good options makes their elasticity of supply low. They’ll likely absorb most of the cost of the tariff by not raising prices very much. The result? Canadian oil producers would bear more than half of the burden of the tariff on oil. The outcome will depend on the goods in question. The fact that so many Canadians are sweating the tariffs that Trump is threatening suggests that they think they will bear a substantial part of the burden.
As a generalization, it’s probably true that we U.S. consumers bear most of the burden of the tariffs that the U.S. government imposes. But there’s no necessity for that. It’s an empirical issue.
Jon rests a lot of his argument on methodological individualism. But noting the relevance of elasticities of demand and supply does not contradict methodological individualism.
READER COMMENTS
Jon Murphy
May 30 2025 at 8:24pm
You’re absolutely right. I should have been far more clear and explicit about elasticities in the post.
David Henderson
May 30 2025 at 11:47pm
Thanks.
Don Boudreaux
May 30 2025 at 9:24pm
All true, and important.
But also true and important is this reality: If tariffs are imposed to protect particular domestic producers from foreign competition – as most tariffs, in practice, are – the tariffs’ “succeed” only insofar as they raise the prices that domestic buyers pay for the tariffed goods and those imported-goods’ domestically produced substitutes. Protective tariffs are meant to raise the prices that domestic buyers pay – and the higher the resulting price hike, the better (from the viewpoint of protectionists). This reality ought always be kept foremost in mind.
David Henderson
May 31 2025 at 10:02am
Thanks, and I agree.
It’s just that we can judge the split of the burden of tariffs by relative elasticities, independent of the motives of the people imposing them. So if I want to know the split, I don’t need to know the motives.
Warren Platts
May 31 2025 at 3:05pm
I respectfully beg to quibble, Dr. Boudreaux. It is true that if foreign producers eat the entire cost of a tariff, then home consumers will import the same quantity before and after the tariff. But it does not follow there is no protective effect. For example, let’s say an American firm that has offshored production to China and has an annual contract of 100 units of minor league baseball hats that only Americans are going to want. The price on the contract is $100/unit and their cost of goods is $66.67/unit so they’re getting a 33.33% gross margin. Not too bad.
Then Trump imposes a 50% tariff. In order to meet their contract of 100 units @ $100, the minor league baseball hat producer would have to lower their export price to $66.67 so that the quantity demanded remains 100 ($66.67 x 1.5 = $100). American buyers haven’t changed their shopping habits; but now the baseball hat manufacturer’s gross margin is squeezed from 33.33% down to zero percent. No doubt that would prompt the firm to think hard about reshoring back to USA.
john hare
Jun 1 2025 at 5:10am
Or drop that product line entirely. If the market will pay $100.00 unit and costs of production here is $90.00, it may not be worth the hassle to set a new factory with all the investment required and regulatory hassles. Especially as the tariff fluctuations may give their competitors an edge when it goes the other way. Most likely result is that American consumers have less product availability.
In my business, I will drop business that is not profitable, though usually after getting bitten. 🙁
Don Boudreaux
Jun 1 2025 at 6:01am
Warren Platts: Your hypothetical doesn’t disprove my point. If the only effect of the tariff is to incite the manufacturer to increase its production in the U.S., then the supply of baseball hats will not decrease and, hence, the price that buyers pay for baseball hats will not fall. But….
(1) The producer now has a smaller stream of profits (and, hence, a lower net worth) because the tariffs denied to that producer the most-efficient means of production; the shareholders of that producer are worse off; and
(2) more importantly, the new or expanded factory and other capital equipment, along with the additional American workers and other inputs drawn into that baseball-hat factory, are necessarily drawn away from other productive uses. The outputs of other American-made goods and services will fall, thus raising the prices of these goods whose supplies necessarily fall if the supply of baseball hats doesn’t. Americans buyers will indeed pay a ‘price’ for this tariff even if your extreme assumptions.
There is no way around it, Mr. Platts: Any policy – tariff, subsidies, you name it – that cause more of one thing to be produced will cause less of other things to be produced. And because there’s every reason to believe that competitive market forces and signals are far more reliable than are political motives at directing resources into their most-productive uses, the value of the outputs the production of which expands will be less than is the value of the outputs the production of which shrinks.
Jon Murphy
Jun 1 2025 at 6:09am
Mr Platts –
In your example, the foreign producer does not eat the tariff. The American firm does. So, you’re just describing the small country model.
Warren Platts
Jun 1 2025 at 11:01am
Yes, the example was contrived. I could have just as easily substituted, however, a gigantic Chinese SOE owned by the CCP that cares nothing for profits and with access to vast governmental subsidies that is directed to increase production even at a net loss, let alone any profits. However, my general point still stands: when the foreign producer eats the entire cost of the tariff, the tariff still has a protective effect by squeezing profit margins, or in the case of the Chinese SOE, by expanding the rate of their losses. Even Communists have a limit to the pain they can endure. Hence the hue & cry coming out of The Empire because of Trump.
Jon Murphy
Jun 1 2025 at 11:22am
No. What I mean is the conditions you describe are incompatible with your story.
Warren Platts
Jun 1 2025 at 2:00pm
Sorry I wasn’t more clear, but the details of the “conditions” and “the story” are utterly irrelevant to the mathematical theorem that if the foreign producer decides to or is forced to eat the full cost of the tariff for whatever reason, then their profit margin will get squeezed:
Net Income = Total Revenue−Cost of Goods Sold (COGS)−Operating Expenses−Other Expenses−Taxes−Interest
If on the right side of the equation, the only thing that changes is an increase in taxes, then Net Income must go down. If the tax is a tariff, this will have a protective effect because if it gets bad enough, the firm will either move production to the USA or to another country not affected by the tariff, or it will cease production entirely as John Hare suggested above; in that case, investment opportunities will open up for U.S. entrepreneurs to start new businesses to take up the slack.
Jon Murphy
Jun 1 2025 at 6:35am
There’s a problem with your story:
If domestic producers can already compete with foreign producers (as necessary in your example), why aren’t they already doing so?
Don Boudreaux
Jun 1 2025 at 8:31am
This reply of mine is better than the one I submitted earlier this morning.
…..
Mr. Platts: You construct a hypothetical example in which a protective U.S. tariff on baseball caps causes no increase in the price paid by American buyers of baseball caps yet nevertheless has, as you say, “a protective effect.” In your hypothetical, the tariff incites the baseball-cap producer to increase its American manufacturing operations to such an extent that the supply of baseball caps – and, hence, the price of baseball caps – remain unchanged. You use this hypothetical to suggest that tariffs can have a protective effect at no cost to domestic citizens.
You’re mistaken.
Even if the producer completely ‘reshores’ its baseball-cap production to the U.S., the supply of these caps will not be as high as it was before the tariff. It will be lower. The reason is that the producer manufactured the caps abroad because that was the lowest-cost method. Manufacturing the caps in the U.S. is more expensive. So even when all baseball-cap manufacturing is ‘reshored’ to the U.S., the supply of baseball caps will be lower, and the prices paid by buyers of these caps will be higher, than before the tariff.
The only way to escape this conclusion is to assume that the cost of producing baseball caps in the U.S. is identical to the cost of producing these caps abroad, and therefore the manufacturer’s decision to produce abroad rather than in the U.S. was a toss-up. While it’s true that under this highly implausible assumption – and only under this assumption – a tariff-induced ‘reshoring’ of all production of baseball caps to the U.S. will not raise the price of baseball caps, it is not true that this tariff will be costless to Americans.
Baseball-cap production in the U.S. cannot expand without drawing resources – capital and labor and other inputs – from other productive activities in the U.S. Therefore, as the tariff fuels an increase in America of the production of baseball caps, it necessarily also fuels a decrease in America of the production of other goods and services. As supplies of these other goods and services fall, their prices rise. Americans’ cost of living goes up. Americans pay.
There is no such thing as a free lunch or free tariff-induced greater domestic production. It is impossible for a tariff to have a protective effect without raising prices paid by domestic buyers.
Warren Platts
Jun 1 2025 at 1:46pm
Dr. Boudreaux, I’m sure you’ve seen this quotation from David Ricardo:
Unfortunately, today’s “men of property” no longer share the values that they had in Ricardo’s day. Thus, American producers offshore to foreign places like China not because costs are lower (especially when you take into account externalities like the environmental degradation and the use of slave labor), but because they can get a higher profit margin. If they move back to USA, the price of baseball hats could go up; or alternatively, since Production = Profit + Wages, the profit margin might be lower, but more of the national income would go to labor (which has gone down dramatically post-China shock). If the price of baseball caps goes up somewhat, that’s only because the externalities of basic environmental, labor, and health & safety regulations are baked into the price in a way they are not in the PRC. In any case, the tariffs won’t cause a rise in the overall price level. If anything, they will be deflationary.
As for whether a new baseball-hat factory will draw away resources from other productive uses, I see what you’re saying, but your argument depends on at least the following three assumptions: (1) that we are at full employment; (2) that manufacturing is already at full capacity; and (3) that service sector jobs are more productive on average than manufacturing. For the USA in 2025, none of these assumptions are true.
(1) There are millions of Americans who would like to work but have not sent out a resume in the past month and are thus not counted in the official statistic. The existence of such marginally attached workers is evidenced by the decline in the labor participation rates since the covid debacle. And if there is a real crisis, we can always turn on the immigration spigot and have more workers than we know what to do with.
(2) Manufacturing value-added has only dug itself out of the 2008 financial crisis in the last few years. Clearly, there is much scope for growth. In fact, right here in little old Brookville, Pennsylvania, there is the old Sylvania plant that is sitting unused, still in good shape, with plenty of square feet to house a baseball hat manufacturing plant, complete with a work force here that’s well-trained in manufacturing of all sorts. Alternatively, last I checked, Brookville Gloves Inc. has expanded into custom t-shirts and baseball hats; maybe they could expand their production to keep up with the reduction in imports.
(3) If enough workers cannot be found from the vast army of the unemployed, then the workers will come from the service sector. Don’t worry, doctors and lawyers and such will not be drafted to work in the new baseball hat factory: rather they will come from assorted burger flippers, Dollar Store clerks, and Door-Dash delivery drivers. The new factory will RAISE their labor productivity. In general, manufacturing labor productivity is well over $200K per year; this figure is far higher than the service sector average, even when the doctors and lawyers are included in that average.
And finally, there is the separate issue of the exploding U.S. trade deficit. Yes, yes, I know, I know: the USA is a wonderful place to invest in! And that will continue to be true — until it is not. Except that story is not what’s really going on. Rather, beggar-thy-neighbor industrial policies in places like China and Germany force surpluses into the global economy that must be balanced by trade deficits elsewhere, and practically, that elsewhere is here because we passively allow foreign industrial policy to dictate U.S. deindustrial policy. This matters because, among other things, once the capital flight happens, it will happen overnight, and potentially we could be in for a financial crisis of proportions that will make the 2008 GFC look like a walk in the park. Then the trade deficit will fix itself, but it will not be pretty. NIIP/GDP was -88% as of Q4 2024 and will probably hit -100% in 2025. So we’re already well into the danger zone.
john hare
Jun 1 2025 at 7:14pm
How do you get a higher profit margin if costs are not lower?
Warren Platts
Jun 2 2025 at 11:33am
Externalities are real costs. The only question is whether they are included in the price of the good or not.
Craig
Jun 1 2025 at 11:14am
The problem I tend to see is that something like hats actually probably should be made in the US just straight up based on cost with or without a tariff. Frankly there’s hundreds of billions of things where the cost of freight exceeds the additional cost of US labor.
Craig
Jun 1 2025 at 11:28am
Another consideration is that many retail items with relatively low price points often have retail prices 4-8x (and for hats more like 10x+) the cost to produce. So the end retail price for something like a hat is more about having a ‘price point’ than necessarily worrying about the cost of goods sold.
Warren Platts
Jun 1 2025 at 7:01pm
No kidding. I just ordered a $4 paperback book, Buchanan’s Essays on The Political Economy actually, and the shipping cost was $8.00. Turns out it is from somewhere overseas, and the delivery won’t be till July. So I canceled that one, and bought a hardback from Washington state that costs $12 and will get here within the week..
Craig
Jun 2 2025 at 10:28am
Also often sellers will do that on marketplaces like ebay so that when buyers sort by lowest price they will get more clicks.
Pierre Lemieux
May 31 2025 at 12:22pm
David: We have to be prudent here. In the standard perfect-competition model, world supply is perfectly elastic. Thus, there is no incidence-sharing of the tax called tariff: the consumers of the tariff-imposing country pay the whole of it. This corresponds to the usual graphical analysis of the effect of a tariff that is used in international tax theory. The results are confirmed by most empirical analyses. Jon may have been more theoretically right than it appears at first sight.
Of course, this is a model. In reality, there is no perfect anything. The fact that foreign producers are harmed by “our” tariffs suggests that world supply is not literally perfectly elastic. (I would add that if the perfect-competition model needs to be qualified, it is as much in its tacit assumption of national preference, necessary to explain why the whole quantity-supplied burden of a tariff is assumed to fall on foreign producers.)
Jon Murphy
May 31 2025 at 12:49pm
You highlight the hidden premise in my argument that I should have been more explicit about:
Many importers are small. They are not big enough to affect the market price, even if the US as a whole is.
Warren Platts
May 31 2025 at 3:37pm
Yes, but as David said, under free market conditions, the burden split depends on the elasticities, not on the sizes of the firms. And contra Pierre, supply is not usually perfectly elastic in the real world. Cf. this IMF study by Tokarick (2014) “A method for calculating export supply and import demand elasticities” where they estimate import and export elasticities for practically every country you can think of. For example, Tokarick estimates that PRC’s long run (includes GE effects) overall export supply elasticity is 1.1 whereas USA’s corresponding demand elasticity is -1.52; thus for a US tariff on PRC, 58% of tax incidence falls on PRC producers and 42% on USA consumers. As for PRC retaliatory tariffs, PRC import demand elasticity is -0.61 and USA’s export supply elasticity is 1.77 implying that 25.6% of the tariff burden falls on USA producers and 74.4% falls on PRC consumers. So either way, the majority of the tariff burden falls on PRC. Figure 1. here.
Jon Murphy
May 31 2025 at 9:44pm
I am using “size” in the technical sense: limited market power
Warren Platts
Jun 1 2025 at 2:03pm
Which is a fancy way of saying that the importers face a highly elastic supply curve. In that case, the small country model applies, yes.
Bill Conerly
May 31 2025 at 4:06pm
Good point, David.
AND … time makes a difference.
Consider a foreign factory with a product designed for U.S. market and factory optimized for that product. Trained workers are at the plant, and a shipment of raw materials just arrived. That company has a very low supply elasticity because so much of their costs are fixed or sunk. They will eat a portion of the tariff and still cover their variable costs.
Over time, they make decisions about replenishing raw materials inventory, training replacements for normal workforce turnover, repairing broken machines, replacing worn tooling, etc. Supply elasticity increases. At some point, all resources are variable and the firm must earn a competitive rate of return on capital. When that day comes, all tariffs are born by people in the importing country.
Jon Murphy
Jun 2 2025 at 8:46am
Very good point about time. Because elasticities change, it seems to me there is a “half-life” of policy
Warren Platts
Jun 2 2025 at 11:36am
That’s also why that Cavallo et al. paper you cited is too short-term to draw any general conclusions about the effects of tariffs.
Jon Murphy
Jun 3 2025 at 7:29am
No. If you understand rudimentary economic theory, the conclusion is just the opposite: the “long term” (that is, the point where elasticity becomes higher as all costs become variable) is really short.