By John F. Di Leo -
What exactly IS a tariff?
We hear about them occasionally in economic and political discussions, but folks who aren’t involved in international commerce never directly encounter them, and therefore may not really know what a tariff is, or how it's applied. Since some politicians – particularly labor union types – advocate hiking our tariffs, they often give the false impression that tariffs are assessed upon foreign countries.
It's almost impossible to tax another country. A government can only tax people or businesses inside its own country (if a Japanese or Dutch conglomerate owns a factory in the USA, then yes, the US government can tax that US factory… but that's about as far as it goes).
A tariff works a little like a sales tax, in that it's usually assessed on the price you pay for the goods… but it really works more like your income tax return, in that you normally hire an expert to figure out your obligation and file it with the government on your behalf. With every import shipment, there is an import packet – much like your annual personal state or federal tax return – that includes government forms, your foreign vendor’s invoices, packing lists, certificates of origin, and your carrier’s bills of lading – on every single import shipment that arrives in the USA… of which there are millions and millions every week, crossing the borders by truck and rail, and arriving at our seaports and airports from all over the world.
None of these shipments can legally be delivered to their buyers until the shipments have “gone through Customs,” meaning, until someone has filed the entry paperwork with Customs and arranged for the duty to be paid.
This scenario goes for both importations of finished goods (like foreign cars and foreign toasters and foreign furniture) and components for further manufacture here by American factories, into American finished goods (American cars and American toasters and American furniture).
Since the tariffs in the news today are on common components for American manufacturing – steel and aluminum sheet, plate, and tubing – let’s imagine a typical purchase of such components by their typical American buyer: an American factory, employing Americans in the production of a common product.
Let's think of a common product with which we are all familiar: ceiling fans.
Let's say you own a factory in Chicago that makes these ceiling fans. Picture it in your mind: to have the materials to assemble these fans, you make some parts yourself, and you buy some other parts from other vendors. Now, I don't know all the parts that go in a ceiling fan, but I'll list the main ones:
- Five steel blades
- The visible flush-mounted steel housing that holds the motor
- The connectors that protrude from the housing to hold the blades
- The bearing housing and set that sits inside the spinning part under the housing.
- The AC motor and power cord
- The chains and pulls that control the fan.
- The mounting hardware
Now, you buy most of the parts locally, having the blades and housings fabricated nearby, let's say, in Indiana and Wisconsin, but you import the motors from China and the nuts and bolts from Taiwan.
You hire a Customs brokerage to arrange the inbound transportation from China and Taiwan. When each shipment arrives in Chicago, your Customs broker files an import Customs entry… just like a tax return … with US Customs. He provides the copies you provided of your vendor’s invoice, packing list and certificate of origin, and your carrier’s bills of lading, and he creates Customs forms, telling Customs – on your behalf – what each product is and what you paid for it… and he calculates the duty you owe, which will vary anywhere from about half a percent up to about five or six percent, depending on the type of motor, and the size and type of nuts and bolts, and so forth.
He pays the duty on your behalf and delivers the goods to your factory, then sends you the bill for the duties along with his bill for the inbound freight. You can't get your cargo out of Customs until this process occurs.
By the same token, all your domestic vendors – the people who fabricate the blades, the housing, the connectors, the mounting hardware, the bearing housing – must obtain their raw materials somehow as well. Some of your domestic vendors probably source their materials from domestic raw materials, and some probably import some of the materials. Perhaps the fabricator who makes your blades uses steel made in a Pennsylvania steel mill; perhaps the one who makes the housing imports the steel from Canada. It varies. It’s almost impossible to find a complex product today that doesn’t include some components that were sourced from abroad. This is a global economy.
If the bottom-line cost – to you – of these purchased materials goes down, your ability to make your finished American ceiling fan competitive will improve. If the cost of these purchased materials goes up, then your ability to keep your finished American ceiling fan competitive will necessarily erode.
So, as you can see, a tariff – an import duty – is a tax on the American importer at the time of importation. The importer – the American factory, American reseller, or American fabricator – pays the tariff on goods when he imports them from abroad.
There was a time, long ago, when import tariffs were simple – you paid five or ten percent of the value of the shipment, and that was that. But over the centuries, governments have carved out protections that have become ever more individually targeted. Today, there are over fifty different classifications for electrical motors, depending on their size and power rating and style, dozens of different classifications of threaded fasteners like nuts and bolts and screws, depending on their size and purpose and material. The US Harmonized Tariff Schedule is several inches thick, with an incredible level of detail.
American duty rates usually range from duty-free up to ten or twenty percent of the price the importer paid, depending on the product (though some products are assessed upon weight, volume or quantity, rather than price). In my experience, the average duty rate on parts used in manufacturing is a little under five percent today. Typical American duties tended to be higher fifty years ago; in the 1970s, the USA engaged in a process to gradually reduce our average import duty rates. Our import rates have been largely static since the early 1980s.
In this time, we have engaged a number of countries in reciprocal free trade agreements, such as NAFTA, CAFTA, the US-Australia Free Trade Agreement, and the US-Chile Free Trade Agreement. We have these reciprocal deals with 20 countries at present. With these programs, qualifying products manufactured within member countries are free of duty between the countries – but only if they qualify, by being manufactured locally, with a required minimum content level of domestic or regionally-originating raw materials and/or labor. (The most common of trade violations is of people who try to claim such duty-free benefits on goods that do not qualify for them, and yes, such violations are prosecuted).
So an importer must be aware of the duty rates on his imported materials… and may take advantage of these reciprocal duty-free programs, or sometimes of certain one-way duty-free programs as well, like the Caribbean Basin Initiative or the Generalized System of Preferences, if his vendor’s goods qualify… and the importer must aim for substantial domestic content if he wants his finished product to qualify for the reciprocal programs as well, when he exports his own finished product.
The import process isn’t an easy one, and a global industry has grown up around both the international transportation and the calculation and filing of export and import clearances, so that importers and exporters have experts to assist them in the process.
This column wasn’t intended to take a position on whether one should favor or oppose a specific tariff, or even a general desire to increase or decrease our range of tariffs. It’s just written for awareness, so we can make policy decisions without misunderstanding what a tariff really is, or how it affects the American importer.
There has been a general, global effort over the past 50 years to lower tariffs across the board, and this has caused many protectionist countries to institute different, “non-tariff barriers” to imports. Some countries lowered their old thirty or forty percent tariffs to four or five percent, as the WTO desired, only to create new VATs, fees, and other taxes to apply to their imports. Some countries place import quotas on importations, requiring costly or even impossible import licenses before a country can source from abroad. Some have picky documentation rules, enabling their Customs agents to hold up import shipments for weeks or months, discouraging companies from the very idea of sourcing from abroad. The WTO says it’s committed to attacking these non-tariff barriers too, but evidence of that commitment is hard to find.
In the final analysis, we have many policy questions to answer when we think about import tariffs. Among them:
Who pays a tariff – the importer, or his customer, or the final consumer (like any tax, the real answer is “all of the above”)?
Should we view tariffs on finished goods differently from tariffs on raw materials that support American manufacturing? For example, importing an Italian car doesn’t employ any Americans outside the transportation company and the car dealer, but importing foreign steel or aluminum employs all the American factory workers who make things from that steel and aluminum. Raising the duty on raw materials and components could drive the manufacture of these finished products to foreign shores, making our protectionism rather counterproductive, to say the least. Surely our protectionist inclinations should keep this difference between finished goods and raw materials in mind.
Does our wide range of duty rates make sense, or should we consider standardizing to a single duty rate? Singapore has a flat 5% tax on imports, regardless of the product. Ours, like most countries, is a range from zero to twenty percent or more. Who does this complex range benefit?
Should we favor our export business over our import business? Is it time we acknowledged that in this global economy, the export and import businesses are intermingled?
Should we make a greater effort to win back industries that we have lost, particularly in areas relevant to national security? (Imagine, for a moment, finding yourself at war with the country from which you get your military hardware. A sobering thought, and an unacceptable risk).
What is the proper response to "dumping" (the practice in which a foreign government subsidizes an industry's exports in order to compete unfairly in the world market)? Are anti-dumping duties on the importer the right way, or should we retaliate more vigorously against the offending country?
Should we reconsider our approach to our reciprocal Free Trade Agreements (FTAs)? On the positive side, these deals – like NAFTA and CAFTA – serve to encourage domestic sourcing and domestic production, because products only get their benefits if the products meet a threshold of domestic content. But on the negative side, these deals primarily address the reciprocal elimination of import duties. The US only charges about a third of a percent in other fees besides duties on most importations, while many of our trading partners – even those FTA partners – assess VATs or GSTs of ten, fifteen, even twenty percent or more. One could legitimately ask, “What good is wiping out a five percent duty if you’re still charging a twenty percent VAT on our products?”
The Trump administration is bringing issues to the forefront that haven’t been discussed in decades. That may be a good thing, but it’s dependent on a level of awareness that’s lacking in the political and media classes.
Trade is complex. What seems protectionist is often destructive. Should we favor the consumer over the manufacturer, or vice versa, or can we find policies that are good for both? Should we favor the products of our allies, over those of our enemies? Should we even the playing field, or continue this 200-year trend to have ever-more varied treatment from product to product?
America is a manufacturing powerhouse, a huge importer and a huge exporter as well. Trade wars are dangerous and disruptive. American manufacturers who depend on imported materials may be forced to close down or move abroad if the price of their materials is artificially increased.
And of course we should always remember the economic dictum that government “should not pick winners and losers in the marketplace.”
We can at least answer one question though, as we close today’s column: Who pays an American import tariff on foreign goods?
Obviously, it’s the American importer. It simply cannot be anyone else. It’s the importer who hires the Customs broker to file that import entry with Customs; it’s the importer who must pay the duties to the US treasury before he is allowed to receive the goods for resale or for further manufacture.
In the end, a tax is a tax, even if you call it a “tariff.”
Some taxation is necessary to fund a government, but there’s just no getting around the fact that an American tariff is an increase in an American taxpayer’s payments to the US federal coffers. It may or may not be legitimate, it may or may not be appropriate, it may or may not be good policy… but it’s still a tax.
Just like the income taxes, social security taxes, and property taxes that an American company pays, an import duty is yet another tax that this American importer pays to the US government… another straw on the camel’s back, another burden on the private sector that adds to the cost of doing business in America. It’s not paid by China or Japan or India or France or Mexico. It’s paid by the importer.
And it’s deceptive to pretend otherwise.
Copyright 2018 John F. Di Leo
John F. Di Leo is a transportation manager, writer, actor, and licensed US Customs broker since 1987. His columns are regularly found in Illinois Review.
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