Menswear Guy is Wrong About Tariffs

Clickbait, EV tariffs, trade jobs and cronyism

Well, not really.

I just know that the fastest way to draw attention to something is to pick a fight with someone who has a bigger audience than you. (See, for example, economists trying to goad Paul Krugman when they have a new book out.)

Anyway, the infamous menswear guy published a viral thread (Twitter and Bluesky) on tariffs, using suit imports as an illustrative example.

The first thing to say is that if his conclusion — that tariffs are ultimately paid by consumers — is the one thing you remember, you already have a better understanding of trade than most politicians commenting on trade.

BUT, for the nerds, in practice the question of who pays tariff is slightly more nuanced.

Because there are really two questions:

1. Where does the cost of the tariff fall?

2. Who literally pays the tariff

On 1) the literature tends to show that in many of instances tariffs leads to an increase in the import price … but it’s less clear that it leads to an aggregate rise in the retail price for consumers. And the question of whether tariffs raise consumer prices really does depend on the product.

Facing a tariff, an exporter could also decide to:

• absorb some or all of the additional cost to ensure its product remains competitive

• push the cost down through its own supply chain by squeezing suppliers

• change how it makes the product to, for example, use lower-cost inputs

In terms of consumer impact, you also then have to account for decisions taken by the retailer — for example, a supermarket — that is subject to its own competitive pressures and pricing strategies.

The findings of this 2019 NBER working paper looking at the pass-through of US China tariffs sums up the issue nicely:

We find that tariffs passed-through almost fully to US import prices, implying that much of 32 the tariffs’ incidence rests with the United States. In these same data, we find far lower rates of passthrough from exchange rate shocks into import prices. Furthermore, despite this rapid increase in the total cost of importing goods, we find more mixed evidence regarding retail price increases, which suggests that many US retailers reduced the profit margin on their sales of the affected goods.

The incoming EU tariffs on Chinese EVs could prove to be a good case study of the complicated impact of tariffs.

The Chinese EV manufacturers have significant profit margins to play with, so may easily absorb some or all of the tariff cost without passing it through to EU consumers. Given the context of Chinese state subsidies and the desire to gain market share, they may even take losses in the first instance in an attempt to gain market share.

Let’s see.

In this instance, I think one of the impacts of the tariffs is that they constrain the ability of the Chinese EV producers to drop the prices even lower, creating an artificially higher price floor, but in the first instance, I doubt they will make the cars more expensive for EU consumers.

So anyway, tariffs are paid by consumers … but they are also often paid a bit by the exporter, a bit by the retailer, a bit by the downstream suppliers, etc too.

There’s then 2), the question of who literally pays.

Again, it is generally a truism that importers pay tariffs. And yes … but given the nature of modern business, the importer might be the same company as the exporter.

For example, Producer X in say, Paraguay might ship a product to the UK, where it is imported by the UK subsidiary of Producer X, who pays any duties levied before selling to the final consumer.

Contracts also matter. For example, if I were to export something to someone in the US and we agreed to use the incoterm Delivery Duty Paid (DDP), then I, the exporter would be responsible for getting the product all the way to their doorstep and liable for any tariff (and other fees) associated with the product entering the US.

One last thing, in the final tweet he makes the point that tariffs are inflationary. Which yes, is true in the general sense. But there is a specific question about whether tariffs would be inflationary in the context of the US. I’ve written about this here, but to summarise: maybe a little bit, but on an economy-wide basis the impact would probably be quite small.

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Can you count?

This week, the Spanish prime minister called on the EU to rethink its decision to impose countervailing tariffs on Chinese EVs.

This is a slight surprise, given Spain’s support for the investigation up until now — but not really a shock, given that China has threatened retaliatory tariffs on Spanish pork.

The question now is, does it matter?

The proposed final duties will be subject to a vote by the EU's 27 members. They will be implemented by the end of October unless a qualified majority of 15 EU members representing 65% of the EU population vote against the levies.

So it’s a question of maths.

Last time round, in an indicative vote, the voting went something like this:

• Votes in favour: Belgium, Bulgaria, Denmark, France, Italy, Latvia, Lithuania, the Netherlands, Poland, Spain

• Votes against: Cyprus, Hungary, Malta, Slovakia

• Abstentions: Austria, Croatia, Estonia, Finland, Germany, Ireland, Luxembourg, Portugal, Romania, Slovenia, Sweden

• Absent from vote (counted as votes in favour): Czechia, Greece

So let’s assume Germany actually votes against rather than abstaining, and Spain joins it.

Germany (19%) plus Spain (11%) = ~30% of the EU population

On the other side, France (15%), Italy (13%) plus Poland (8%) = ~36% of the EU population, enough to carry the vote.

So as of now, even without Spain’s support — and it wouldn’t suprise me if both Germany and Spain abstain rather than vote against — it looks like the tariffs are passing. If France and Italy change their mind, we would need to rethink.

All of this is to say, I think Spain has kinda a free hit here. Its support isn’t needed for the tariffs to come into force, so it can spend the next few months pretending it doesn’t want them in the hope China will be a bit nicer to them in response.

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Trade Job

The UK Trade Remedies Authority (TRA) is looking for some new board members. If you think any of these apply to you, apply!

To complete the skills of existing Board members, the TRA is particularly seeking experienced, senior and knowledgable candidates from all parts of the United Kingdom who bring the following skills and knowledge to the board:

• intellectual or academic strategic context and thinking on global trade. 

• cyber, AI and digital knowledge to better support transformation and manage risks across the TRA.

• experience of change leadership in an investigative body. 

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Cronyism

With thanks to substack called “Libertarian Land” (I know, I know …) for flagging, a new NBER paper flags a slightly counterintuitive impact of tariffs: cronyism! [emphasis added].

Using both the onset of the US-China trade war in 2018 and the most recent Russia-Ukraine war and associated trade tensions, we show a counterintuitive pattern in global trade. Namely, while the average firm trading with these nations significantly decreases their trade with these jurisdictions following sanctions, government-linked firms show a marked contrast. In particular, government-linked firms actually significantly increase their trading activity following the onset of formal sanctions. The increase is large - roughly 33% (t=4.01). We find no increase broadly to other countries (even countries in the same regions) at the same time, nor of these same firms in these same regions at other times. In terms of mechanism, government-linked supplier firms are nearly twice as likely to receive tariff exemptions. More broadly, these effects are increasing in the level of government connection. For instance, firms geographically closer to the government agencies they supply increase their imports more acutely. Using micro-level data, government-supplying firms recruiting more employees with past government work experience also increase trading activity more – particularly when the past employee worked in a government-contracting role. Lastly, this results in sizable accrued benefits in terms of firm-level profitability, market share gains, and outsized stock returns.

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Best wishes,

Sam