By Greg Ip 

Port Jefferson, N.Y.

Escalating tariffs between the U.S. and China have fueled an acrimonious debate over who's paying. President Trump says China; his critics say Americans.

The answer isn't straightforward because, as with any tax, the person paying the tariff doesn't necessarily bear its burden. If the tariff is simply passed along to the importer, American businesses or consumers bear the burden. If Chinese exporters cut prices to avoid losing sales, they bear the burden. If imports shift to another country, no one pays the tariff -- but Chinese are burdened by lost jobs and Americans by a higher price. And if production shifts to the U.S., some of what Americans pay in higher prices goes to other Americans as wages and profits.

When Cecil Hoge and his half-brother John Hoge were faced with tariffs on the inflatable boats they import from China, all these options came into play. Their 30-employee company, Sea Eagle Boats Inc., is a microcosm of how tariffs ripple through supply chains.

The Long Island-based company began importing inflatable boats from Europe in the 1960s, then shifted to imports from China in the 1990s. There, three companies -- one South Korean, one Taiwanese and one Chinese -- made all of Sea Eagle's models, from simple kayaks to 16-foot fishing craft.

They escaped Mr. Trump's initial 25% tariffs on $50 billion of Chinese imports, but could see the writing on the wall. John Hoge persuaded their South Korean supplier to move production from China to a factory it owned in Vietnam. The other two, with no such backup, declined. "We are a small company," Zhong Mengying, one of those suppliers, explained in an email to The Wall Street Journal. "It is not worth [it] to move to other countries." U.S. sales are small, anyway, while sales to Europe and China are rising, she added.

So Sea Eagle asked for discounts to offset the tariff, noting the Chinese yuan had fallen against the dollar, giving sellers some added profit margin. Ms. Zhong cut prices about 5%. The third supplier declined. "Our prices are already the lowest we can offer," the third supplier explained in an email to The Wall Street Journal. Says Cecil Hoge: "There's not much margin any of these companies have, because every company in the U.S. -- ourselves included -- will constantly ask for the best possible price."

In September, Mr. Trump imposed a 10% tariff on $200 billion of additional imports, including Sea Eagle's boats, delaying an increase to 25% to give China a chance to resolve complaints of discrimination against American companies and technology theft. On Jan. 1, Sea Eagle raised prices on its Chinese-made boats an average of 7.5%.

Sea Eagle has now paid $176,000 in tariffs to the U.S. government and recouped all of it by raising prices to customers, Cecil Hoge says. More than 70% are individuals ordering off the Internet; the remainder are resellers. Sales this year have dropped, though the brothers mostly blame unfavorable weather. Sales to Amazon.com Inc. have collapsed because the Internet giant won't let vendors raise prices on items sold under Amazon's name, John Hoge says. (Sales through Amazon under Sea Eagle's own name were unaffected.)

So Americans pay most of Sea Eagle's tariff, one supplier pays some, and for boats now made in Vietnam, no one pays. The tariff means some sales will never happen -- which everyone pays for. That turns out to be typical for all of Mr. Trump's tariffs.

David Weinstein, a trade economist at Columbia University, and two co-authors examined the six waves of tariffs Mr. Trump imposed last year and found prices exporters charged to American customers barely responded to the tariff. Once the duty is included, they estimate Chinese imports' prices jumped 20% to 25%. Americans paid in two ways: U.S. importers' profit margins absorbed some tariff, and some end-consumers paid higher prices. Goldman Sachs economists found consumer prices of the nine most-affected goods have risen 3% since 2018 while all other goods (excluding food and energy) have fallen 2%. They found some American manufacturers took advantage of the tariff to raise their prices, exactly as protectionist tariffs are meant to work.

Mr. Weinstein and his co-authors conclude Mr. Trump's tariffs have been fully borne by Americans, at a net cost to the country of $1.4 billion per month. Mr. Trump has claimed China has absorbed 21 percentage points of the 25% tariff, but that appears to be inferred from research Mr. Weinstein co-authored in 2006. Mr. Weinstein says it was not based on experience with actual tariffs, whereas his latest paper is.

Mr. Trump hoped his tariffs on steel and washing machines would revive American production; his tariffs on China have a different goal: changing China's behavior. John Hoge thinks Mr. Trump should only target those imports benefiting from stolen American know-how.

Sea Eagle emailed thousands of customers explaining they were raising prices because of Mr. Trump's tariffs. Several angrily replied, "How dare you criticize President Trump?" Cecil Hoge recalls. Others echoed Mr. Trump in demanding they make their boats in the U.S.

In fact, John Hoge explored just that two years ago when Congress was weighing a new tax code that would penalize imports. Because inflatable kayaks have never been made in the U.S., the inputs -- machinery, fabric, components -- would have to be imported, often from China. "We'd need to replicate all the tooling which would be very expensive," he says. "And of course, we're paying through the nose in tariffs, which doesn't make it easy to get capital."

Last week Mr. Trump raised the 10% tariff to 25%, so the Hoges are bracing for a big drop in sales when they pass that on to customers, probably next year when current inventory is exhausted. They are contemplating selling only higher-end boats -- where price is less of a constraint -- which would leave them a smaller company. "Tariffs will kill the middle-class market," says John Hoge. "There are only so many boats that can be sold to doctors and lawyers."

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

May 15, 2019 12:45 ET (16:45 GMT)