The debate raged somewhat inconclusively in the comments to yesterday's post.
Short answer is, nobody really knows - is it the exporter in the other country (who has to accept lower net selling prices) or is it the consumer in the importing country (who has to pay higher gross selling prices) or some combination of both? Similarly, tariffs must lead to a lower volume of trade, which doesn't just hurt the exporter and the consumer but has bad knock-on effects all round (which are nigh impossible to measure).
You can't generalise, except to say that a tax is borne by the less elastic factor - supplier or consumer. So domestic VAT is almost entirely borne by the supplier. I can choose whether to spend my hard-earned on taking the family to a local restaurant for a meal, or to the local cinema to see a film (so demand for either is highly elastic); the local cinema owner can't just turn off his screens and start serving meals and vice versa (inelastic).
(It puzzles me that the protectionists get so het up about WTO "standard tariffs" which average around 5% while ignoring the immensely more damaging effects of our domestic tariff (VAT) which is 20%, but hey.)
A factory in China bashing out TV sets for sale world-wide has, from its point of view, more or less infinite demand. If one or the other country puts a tariff on Chinese TV sets, well what do they care? The tariff is borne by the consumer in the importing country (especially if there are no domestic TV manufacturers). If volumes drop, the Chinese TV factory will switch to making radios or hair dryers or something else which suffers lower tariffs or which they can sell to non-tariff countries.
Compare that with tobacco companies. Demand is price inelastic (addictive), suppliers supply internationally so supply is elastic. Tobacco duties are passed on more or less 100% to the consumer, the domestic government collects it and producers (domestic or foreign) aren't really affected at all (barring from the small reduction in volumes).
Then we get to comparative advantage, which brings a third party into the mix - the domestic producer who is at a small cost disadvantage. If the tariff on the cheaper foreign product is larger then the cost difference, the cost is borne by consumer (higher price) and foreign producer (lower volume); a large part of the benefit of the tariff goes to the domestic producer (higher price and lower volume).
And so on.
Debate Magazine
