Trade Tensions: Who Pays for the Tariffs?

New York Federal Reserve economists found that the tariffs imposed by the US in 2018 have had complete pass through into domestic prices of US imports, which means that Chinese exporters did not reduce their prices. One of the reasons is that most of the export goods quotation quoted by the Chinese sellers are in Free On Board (FOB) and terms, where tariffs or taxes are not paid by the sellers.

Going forward, it is likely that the US importers and consumers may continue to bear the increased tariff costs as the operating margin of Chinese exporters are often in mid-single-digit and could not afford to bear additional cost caused by the US tariffs. This might not affect US CPI that much, since the import component is small, but it could affect US corporate profits much more.

For Chinese exporters, the pain would come in the form of declining orders. Among MSCI China Index members, Auto Components and Semiconductors have the highest average exposure at over 12%, while Retail, Food and Staples have the least exposure. Higher exposure has generally led to poor performance, while other sentiment factors also exerting influence, such as fears of regulatory tightening on US listed Chinese firms.

Citi economists estimate that 25% tariffs on US$250B of Chinese goods exports to the US would reduce employment in China by 4.4 million workers, a full-blown trade war with 25% on all Chinese goods exports to the US could lead to job loss of near 10 million.