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.
