A 60% tariff is a tax on Americans

Donald Trump has formally restated his plan for a sixty per cent tariff on all imports from China, a shock without modern parallel for US trade. The campaign presents the levy as a fine on Beijing. Modelling by the Peterson Institute for International Economics (PIIE) shows American households paying most of it.

A tariff is collected by American customs from the American company that imports the goods. Chinese exporters do not write the cheque. The only question is how the cost is then shared: whether the Chinese seller cuts its price to keep the business, whether the importer absorbs it in thinner margins, or whether the retailer passes it on to the shopper. The evidence from the last trade war is that the shopper and the importer carried almost all of it.

A bill for every family

PIIE reckons that a sixty per cent tariff on China, together with a universal baseline duty on other imports, would cost the average American family about $2,600 a year in lost purchasing power. Supply chains for consumer electronics and clothing cannot be brought home overnight. Americans will pay through higher shelf prices, and the cost falls hardest on poorer families.

The regressive effect follows from how people spend. Poorer households spend a larger share of their income on goods, and a larger share of those goods are cheap imports such as clothing, shoes, toys and small appliances, many of them made in China. Richer households spend more on services, which tariffs do not touch, and save more of what they earn. A flat charge on imported goods therefore takes a bigger bite from a cashier's wage than from a lawyer's salary.

What the last trade war showed

In 2018 and 2019 the first Trump administration imposed tariffs of up to 25 per cent on Chinese goods, eventually covering roughly $370 billion of imports a year. Academic studies of that episode, including work by economists at the Federal Reserve Bank of New York, found that close to the full cost was passed through to American buyers. Chinese export prices barely fell. The cost showed up in the prices paid by American importers and, in time, in the prices faced by their customers.

The washing-machine tariffs of 2018 gave a vivid example. Prices of imported washers rose after the duties were imposed, and so did prices of dryers, which were not subject to the tariff, because retailers and manufacturers raised them in step with the machines they are usually sold alongside. Tariffs lift the price of domestic substitutes as well as imports, since local producers facing less competition have less reason to hold prices down.

Retaliation and diversion

China did not sit still last time. It put tariffs on American soybeans, pork and other farm goods, and exports of those products to China fell sharply. Washington then paid farmers tens of billions of dollars in compensation, so taxpayers covered part of the cost twice: once at the checkout and again through the farm programme. The Phase One deal signed in January 2020 committed China to buy more American goods, but its purchases fell well short of the targets.

Trade also found other routes. Imports from China have fallen as a share of the American total since 2018, and last year Mexico overtook China as the largest source of American imports. Much of that shift reflects Chinese firms moving final assembly to Vietnam, Mexico and elsewhere, with Chinese components still inside. A sixty per cent levy on China alone would encourage more of that rerouting, which is why the plan pairs it with a universal duty on everyone else.

Why the offsets are small

Supporters of the tariff point to two offsets. The first is the exchange rate: if the renminbi weakens, Chinese goods become cheaper in dollars, cancelling part of the tariff. That happened in 2019, when the currency weakened past seven to the dollar. At sixty per cent, though, the currency would have to fall far further than Beijing is likely to allow without triggering capital flight. The second offset is revenue, since tariffs raise money that could fund tax cuts. The revenue shrinks as imports fall, and it comes disproportionately from the households least likely to benefit from cuts to income or corporate taxes.

The deeper argument for the tariff is strategic: that America should reduce its dependence on China for critical goods, whatever the short-term cost. That case has merit for semiconductors, medicines and defence supplies, and it has bipartisan support; the Biden administration kept most of the first-term tariffs and raised some. It is much weaker for T-shirts and toasters, where a blanket levy mainly raises prices without creating many American jobs.

How quickly it arrives

The president does not need Congress to impose most of these duties. Existing trade laws allow tariffs on national-security or unfair-trade grounds, and emergency economic powers could be used for broader levies. Importers know this, and many are already bringing orders forward to beat any deadline, which will flatter imports and retail inventories in the coming months before the effect reverses.

Retailers typically work on seasonal buying cycles, so the first price increases would show up in the next season's orders rather than on existing stock. Large chains would try to spread the cost across suppliers and categories. Smaller importers, with less bargaining power and thinner margins, would have to pass it on more quickly, or go out of business.

What to watch

The first signals will be the names chosen for the trade and Treasury jobs, and whether the new administration uses executive powers in its first weeks. After that, monthly import prices and core goods inflation will show how much of the duty is being passed on. Any response from Beijing, whether in the currency, in export controls or in retaliatory tariffs on farm goods, would tell American farmers how exposed they are.

A sixty per cent tariff on China would work as a regressive sales tax on Americans. Families would start to feel it at the checkout within months, long before any factories come home. If it is imposed in the first half of next year, expect goods inflation, which has been close to zero, to turn clearly positive by the autumn, with the heaviest burden on households in the bottom half of the income distribution.