Chaonan Feng, Liyan Han, and Lei Li

7 July 2023

The question of who bore the burden of tariffs during the US-China trade war has received considerable attention. Research by Chaonan Feng, Liyan Han, and Lei Li documents an asymmetric tariff pass-through between China and the US and examines the reasons behind this difference. Chinese importers paid only around 68% of China’s retaliatory tariffs, while US importers shouldered around 93% of the US tariffs.

The difference can largely be explained by the two countries’ different import structures and by substantial product-level heterogeneity in tariff pass-through.

The unprecedented tariff increases during the US-China trade war generated extensive debate about the economic consequences of trade protectionism. The authors find that US tariffs fell predominantly on US importers, in line with previous studies, whereas Chinese importers bore only about two-thirds of the Chinese retaliatory tariffs.

These findings are notable for two reasons. Average pass-through in China was substantially lower than in the US, and complete tariff pass-through is relatively uncommon, particularly for a large economy such as the US, which has considerable market power and may influence its terms of trade.

By decomposing average tariff pass-through, the authors show that the difference between China and the US is mainly related to their different import structures, variation in pass-through across products, and the trade policies adopted by the two countries.

Import structure and product heterogeneity

China and the US had markedly different import structures. Major Chinese imports from the US included agricultural products such as soybeans and corn, as well as high-end manufactured goods including aircraft and vehicles. The US, by contrast, imported large quantities of labour-intensive products from China, including electronics.

Estimates across broad product categories show substantial differences in tariff pass-through. Agricultural products, including vegetable and animal products, and high-tech manufactured products such as aircraft tend to have relatively low pass-through rates.

Pass-through can also differ between China and the US even within the same product category. The rates for aircraft, vehicles, and plastics are relatively similar across the two countries, while much larger differences appear for textiles, food, and machinery.

The analysis further shows that, under perfect competition, a higher ratio of import demand elasticity to export supply elasticity results in lower tariff pass-through.

The US therefore had a higher average tariff pass-through partly because it imported more products from China with relatively high pass-through, such as electronics. China imported a larger share of goods with relatively low pass-through from the US, particularly agricultural products.

Tariff regime

China and the US also followed different strategies in choosing the products subject to punitive tariffs, which affected their respective average pass-through rates.

The Trump administration was particularly concerned about future Chinese competition in high-tech sectors. Its objectives therefore extended beyond short-term economic considerations such as improving the terms of trade or reducing the trade deficit.

The first waves of US tariffs consequently did not concentrate on several of the largest categories of imports from China, including electronics, textiles, footwear, toys, and furniture. Instead, they placed greater emphasis on high-tech products such as optical instruments and machinery.

The estimated tariff pass-through rates for optical instruments and machinery in the US were 1.09 and 1.28 respectively. Together with the composition of US imports and the design of US trade policy, this contributed to the high average US pass-through rate.

China, in contrast, imposed retaliatory tariffs on major imports from the US, including animal and vegetable products. The estimated pass-through rates for these two categories were 0.63 and 0.81 respectively, contributing to a lower average tariff pass-through in China.

The pattern of Chinese retaliatory tariffs suggests that the measures were intended to place substantial pressure on US exporters.

Conclusion

Against the background of growing international tensions and concerns about economic decoupling, understanding who ultimately bears the cost of trade sanctions has become increasingly important.

The research documents a pronounced asymmetry in tariff pass-through during the US-China trade war and shows that product heterogeneity plays a central role in determining the economic incidence of tariffs.

The analysis is based on the paper “Who Pays for the Tariffs and Why? A Tale of Two Countries” by Chaonan Feng, Liyan Han, and Lei Li.

Prof. Lei Li is Professor in Economics and Politics of China at the University of Göttingen.

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published by CEPR on 7 July 2023.