Who Pays for the Tariffs and Why? A Tale of Two Countries

Abstract

During the U.S.-China trade war, the U.S. punitive tariffs were almost entirely borne by U.S. importers. In contrast, only 68% of China’s retaliatory tariffs were paid by Chinese importers. The puzzling difference between the U.S. and China is mainly driven by their different import structures and product heterogeneity in tariff pass-through. China mainly imported products with lower tariff pass-through from the U.S., such as agricultural products and aircraft, while the U.S. primarily imported products with higher tariff pass-through from China, such as electronics. Furthermore, we decompose the product-level tariff pass-through and show that a higher ratio of import demand elasticity over export supply elasticity leads to lower tariff pass-through under perfect competition.

Keywords: trade war, tariff pass-through, import structure, product heterogeneity, demand elasticity, supply elasticity

JEL Classification: F130, F140, F610