Reality check: Canadian tariffs on Chinese goods

The government’s favourite talking point on recent tariff hikes is that the existing system represents a “special tax break for Chinese companies.” I have already addressed the tax fairness issue, but there is also an underlying assumption here that Canadian tariffs on Chinese goods are wholly or mostly paid for by Chinese companies. The reality is that very little of the tariffs placed on Chinese goods are paid for by Chinese companies.

The argument made by the government is not one about laws as the tariff is not placed on the Chinese manufacturer. Rather, the tax is placed on the Canadian importer of the good, since the manufacturer is outside of Canada’s jurisdiction. However, the importer will likely share this burden with other parties including the retailer (through higher wholesale prices) and the consumer (through higher retail prices).

In theory, some (or all) of the Canadian tariff can be paid for by the manufacturer, as the existence of the tariff can drive down the product’s demand. That reduction in demand causes a price drop for the good, so the tariff is somewhat “paid” by the manufacturer through lower prices. This is likely what the government has in mind.

However, as a practical matter, higher tariffs in Canada are unlikely to put much of a dent in the worldwide demand or price of goods made in China. A well-known concept in international trade circles is that economically small countries do not influence the price of foreign goods due to their negligible impact on overall demand. Canada’s economy, while not tiny, only accounts for 2.4% of Chinese exports. Because of Canada is a relatively small market for China, the tariff burden for most goods will fall on Canadians instead of the manufacturer. The government is correct to point out that their tariff reductions on hockey helmets and baby clothes will “benefit Canadian families and retailers”, as this is likely to be the case.

The small portion of the tax burden that remains for manufacturers is paid for by companies manufacturing in China, but many of these are not Chinese companies at all. It is true that some Western companies have their goods produced by Chinese-owned Original Equipment Manufacturers (OEMs).  Foxconn, which manufactures goods in China for Apple, would be a classic example of a Chinese OEM, if it were not for the fact Foxconn is a Taiwanese company operating in China. Like Foxconn, many of the companies in China are Wholly Foreign Owned Enterprises (WFOEs), so the “made in China” toothbrush or doormat you bought could be manufactured by an American, German or even Canadiancompany.

Characterizing low tariffs as being a “special tax break for Chinese companies” is a good political talking point. But the reality is that a small fraction of the tariff on Chinese goods is paid for by the manufacturer in China, and only a fraction of that fraction is paid for by Chinese companies.

Mike Moffatt writes for Canadian Business where this first appeared. More of his columns here.