The Costs of Trump’s Import Tariffs Have Landed Entirely on US Citizens

US importers and consumers experienced $12.3 billion in added tax costs and another $6.9 billion from unrecoverable reductions in welfare arising from the 2018 tariffs, new study finds.

 

 

Photo by Michael Vadon [CC BY 2.0], via Flickr

In January of 2018, the United States placed tariffs on washing machines and solar panels, beginning a trade war that continues to this day. Like many conventional wars, the trade war escalated. While the first round of tariffs only affected $10 billion dollars of imports, as the US and many of our trading partners engaged in tit-for-tat retaliation, the amount of trade covered by tariffs rose steadily. Using the pre-tariff import levels as a benchmark, the US is now imposing new tariffs on $283 billion of imports, and foreign countries have levied retaliatory duties on $121 billion of US exports.

 

President Trump justified US actions by tweeting “Trade wars are good, and easy to win.” As we pass the one-year anniversary of this tweet, it is obvious that trade wars are not easy to win quickly, but are they good? Economists have long know that trade wars can be good for some countries (at the expense of their trading partners) if a country can apply a tariff that induces exporters to substantially reduce their export prices in order to maintain their market access. For example, if the reaction of foreign solar panel makers to the new 30 percent US tariff were to drop their prices by 30 percent, the US could gain because the foreign producers of solar panels would absorb the full cost of the import tax thus leaving the landed prices of solar panels unaffected and filling the coffers of the treasury with the tariff revenues. If foreign exporters do not drop their prices, however, then purchasers of solar panel prices will bear the full cost of the higher import taxes and also incur welfare losses as some choose less efficient means to generate electricity.

 

Thus, whether these tariffs are beneficial or not is an empirical question that we can now answer. In a recent paper, Mary Amiti of the Federal Reserve Bank of New York, Stephen Redding of Princeton and I analyzed the impact of the 2018 tariffs on the prices and import quantities of millions of import flows. The results clearly show that the costs of the import tariffs have landed entirely on US citizens. As a result, imports in targeted sectors have fallen precipitously as double-digit tariffs have been levied on our imports.

 

Through November 2018, US importers and consumers experienced $12.3 billion in added tax costs and another $6.9 billion from unrecoverable reductions in welfare arising from the tariffs forcing consumers to cut back on import purchases. Since many of these tariffs were only applied in October, the costs are mounting rapidly. By November 2018, purchasers of imports were paying $3 billion per month in import taxes and suffering another $1.4 billion per month in unrecoverable welfare costs. To put this into perspective, if we were to think that a successful outcome from the trade war would be the creation of 35,400 manufacturing jobs—the number of steel and aluminum jobs lost in the last ten years—then the welfare loss per job saved is $195,000, which is almost four times more than annual wage of a steel worker: $52,500.

 

“To put this into perspective, if we were to think that a successful outcome from the trade war would be the creation of 35,400 manufacturing jobs—the number of steel and aluminum jobs lost in the last ten years—then the welfare loss per job saved is $195,000, which is almost four times more than annual wage of a steel worker: $52,500.”

 

Our paper also documents other substantial additional costs, brought on as US manufacturers have reacted to the increase in protection by raising prices of US-produced output. Part of this increase comes from the fact that many tariffs—such as those on steel and aluminum—raise the input costs of US manufacturing. The other part arises because US producers, now shielded from foreign competition are free to raise prices. Taken together, these two forces have raised the prices that purchasers of domestically-made manufactured goods by 1.1 percent.

 

We also find that there are substantial impacts on global supply chains as well. US and foreign importers are in the midst of a massive reorganization of supply chains so that they can source not from the most efficient supplier, but from the one that can enable them to avoid the new tariffs. On an annual basis, approximately $136 billion of US imports are being redirected to avoid the tariffs and another $29 billion of US exports have had to find new markets as a result of the tariffs. 

 

In addition to these losses, there are likely other substantial costs that are as yet unquantified. Chief among these is uncertainty. As the negotiations with China drag on, firms need to make investment decisions not knowing if US tariffs against China will remain at the 10 percent level, rise to 25 percent if negotiations fail, or fall to zero if they succeed. This type of uncertainty is also known to have big effects on exporters who are often averse to make investments when they don’t know costs and may help explain why global stock markets have been reacting negatively to talk of trade wars. Whether these costs will dwarf the substantial, known costs is the subject of future research. 

 

David E. Weinstein is the Carl S. Shoup Professor of the Japanese Economy, Director of Research at the Center on Japanese Economy and Business, and former Chair of the Department of Economics at Columbia University.

 

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