Now more expensive in India

It’s a common enough misconception out there that when we slap taxes, duties and tariffs upon imports then it’s those dastardly foreigners who lose out. Donald Trump and Peter Navarro, his adviser, definitely believe this. The European Union seems to as well for their reaction to Trump’s American import tariffs on steel and aluminium is to threaten to make European consumers poorer by taxing American goods.

The entire idea is of course an error. Any imposts – meaning tax, duty, tariff – upon an import is clearly and obviously paid by the people who buy the goods, the consumers in the country imposing the taxation. This is not one of those concepts to be argued about, it simply is. As this example from India shows:

German luxury car maker Audi on Friday said it will increase prices of its vehicles by up to Rs 900,000 from April 1 to pass on the impact of increased customs duty in the Budget.

The price across the entire model range will be increased by up to five per cent owing to the hike in the customs duty announced in the Union Budget, Audi India said in a statement.

And there we have it. Put up import duties and the goods become more expensive. So, who is now paying that tax? The people who buy the imported item, obviously, it ain’t Johnny Foreigner now, is it?

Except that’s not all. For every Indian consumer of cars – including those who don’t buy an Audi nor even think of doing so – is also paying this tax. That barrier to imports also means that domestic manufacturers face less price competition and we know what happens then. Their prices rise – or at least don’t fall as far as they would in the presence of more competition. This is rather the point of the tariffs in the first place, to raise the price of cars within India by protecting domestic manufacturers from that foreign competition.

All Indians, at least all those in the market for a car, are made poorer by these tariffs. Just as all Americans are going to be made poorer by Trump’s steel and aluminium tariffs, just as all Europeans will be by any EU reaction to them.

Tariffs impoverish the population supposedly shielded by them. We really shouldn’t be having them therefore, should we?

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  1. Let me shortcut this argument, for Tim seems to understand it on the issue of tariffs but not carbon tax. Here’s a truth ignored by economists whenever it suits them: Only people pay for everything, because only they can’t pass the charge on.

    • Tim has occasionally advanced an idea that seems similarly counterintuitive: that certain land taxes burden the landlord rather than being reflected in rents and paid by the renters. We ought to have this out some day.

    • Pigou taxes are spite and vengeance taxes. You are doing something we have decided is horrid and since there are no practical means to stop you, we’ll give you a good kicking instead to make us feel better.

  2. Trump took aim at Walmart’s purchases of Chinese potato parers that deliver better value for cost than our own, and SunPower’s purchases of Chinese solar cells so that buyers of its finished modules could install solar roofs, to punish China for having an inequality in arbitrary statistical totals. Surely disrupting transactions harms Chinese businesses (and I suppose we can regard China as monolithic), but it also harms the purchaser. Both have to look for new alternatives or pay the costs and pass them down.

    A blogger at Motley Fool (not ideological beyond being a booster of “renewable” energy) discusses the harm already being done by the solar tariffs. (SunPower’s chairman told investors that, before the tariffs were even finalized, they were disrupting deals in the works.)

    The best thing about these tariffs is waiting for them to end.

  3. I reckon a couple of things:

    * Trump and his cabinet know fine well how tariffs work.

    * It’s not about making Johnny Foreigner pay, it’s about jobs.

    Jobs are of course, as Tim always says, a cost. But try telling an unemployed auto worker how fortunate it is that the cost of putting food on his family’s table has been avoided by his former employer.

    The Bell Curve implies that about half the population (probably more than half, thanks to low-IQ immigration) will never be able to meaningfully contribute to the whiz-bang information economy. As in never. As in no amount of government programmes are going to change that awful biological reality.

    So, do we want to pay those guys to get drunk, do drugs, fight, and have lots of illegitimate kids, or would we rather pay them to hold down stable family-man type jobs?

  4. Let me shortcut this argument even further. Despite my respect for Timmy, I’m going to take him to the woodshed on this one… Why? For ignoring certain one real world fact: Donald Trump has publicly stated that he will be happy to negotiate these tariffs on a country by country basis. Which he is already doing (Australia).

    Trump wants better trade deals. There is nothing inherently counterproductive about that. In fact, protecting and enhancing ‘Merica’s interests are part of his job (after eight years of Obama that’s a fact almost forgotten). And those who are happy with the status quo are not going to agree to new, less advantageous agreements unless pressure is applied. The tariffs are that pressure.

    That’s Negotiation 101.

    There’s a reason nobody gives a fat rat’s fanny about what people like Gary Cohn think. They aren’t interested in rolling up their sleeves and doing the hard work needed to solve real problems in the real world. Gary Cohn, with a life on Wall Street and hundreds of millions in his pocket, wants to pronounce platitudinous platitudes that protect the interests of his pals (and his class), rather than look after the interests of blue collars workers in flyover territory.

    It’s worth remembering Keynes: “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.”

    Don’t tell me the storm will pass and it will once again be safe to sail. Build me a better boat so I can sail through the storm safely.

    • Which he is already doing (Australia).

      Add Canada and Mexico, for the explicit purpose of getting them to take American demands seriously regarding the NAFTA free-trade treaty. Add anyone else who comes to the table in the 15 days before it takes effect. Larry Kudlow (before his appointment as Trump’s National Economic Council chairman) wrote that he was “certain” the ultimate agreement would only hit China and Japan, both together a tiny bit of the US market. The initial announcement was not the final deal; Trump was using a Presidential power to bull his way to the negotiating table.

  5. ‘That barrier to imports also means that domestic manufacturers face less price competition and we know what happens then. Their prices rise – or at least don’t fall as far as they would in the presence of more competition.‘

    So UK consumers are de facto paying WTO tariffs on imports from the (not a) Single Market because of the Customs Union, so if the UK just gets on with it and leaves without a (oxymoron alert) free trade deal and imposes WTO tariffs on incoming EU goods, British consumers would be no worse off, but if UK removes EU tariffs and non-tariffs on imports from rest of the World, the UK consumer will be tons better off because of the competition, and even EU exporters will have to lower prices to compete too.

    So UK better off with the famous ‘no deal’. Can that be right?

  6. So UK better off with the famous ‘no deal’. Can that be right?

    The “UK” probably would be. In aggregate.

    Certain vocal groups, however small, wouldn’t be. And that’s the point of the OP, I think.

  7. So UK better off with the famous ‘no deal’. Can that be right?

    It might certainly turn out that way.

    It did for New Zealand when it removed nearly all tariffs and economic subsidies. The economy took a bit of a hit as useless jobs that only existed because of the distorted system were lost, but the damage was extremely short lived. If nothing else, the government not shelling out subsidies has stabilised the internal budget.

    • True; even our current Governing coalition of socialists, nationalists and environmentalists are struggling to spend enough to diminish the budget surplus that they inherited from the conservatives!

      Thoughts are that we will probably get an exemption to the tariffs, our exports of steel and aluminium to the US are vanishingly small and we actually have a small trade deficit with the USA.

      We still have some tariffs, but not many and not at high rates. Would be good to get rid of them completely though!

  8. But Audi also loses out by not selling as many cars to India. It is not just the Indian consumers of cars who lose out by tariffs. Non? So it’s not quite right that the “entire idea” of the foreign manufacturer losing out is wrong.

  9. @JT
    Audi lose a lot. Things like cars, where there’s heavy pre-production costs, the “last” car made is always the most profitable one. This will shift the “last” car back by the number of cars not sold in India.