Tariff Impact Reduces US Consumer Income by $1.4 Billion a Month

Economy

Published: March 4, 2019 8:15 am

Last Updated: January 11, 2020 10:36 am

In a paper posted Friday, three economists report that since President Trump began last March imposing tariffs on goods imported into the United States from China — and since June, Canada, Mexico and the European Union — U.S. consumers were experiencing a reduction of real income of $1.4 billion at the end of 2018.

Contrary to the president’s expectations when the tariffs were first imposed that the effect would be borne by foreign exporters forced to lower prices, there is “little evidence” that this has happened, implying “that the full incidence of the tariff has fallen on domestic consumers so far.” The amount of revenue generated by the tariffs “is insufficient to compensate the losses being born by the consumers of imports.” In other words, U.S. consumers are poorer as a result of the Trump administration’s trade war.

Not only have the tariffs cost U.S. consumers real income, but the effect is also consistent with what should have been expected. From the paper:

While the long-run effects are still to be seen, over the course of 2018, the U.S. experienced substantial increases in the prices of intermediates and final goods, large changes to its supply chain network, reductions in availability of imported varieties, and complete passthrough of the tariffs into domestic prices of imported goods.

The researchers also noted that the United States is not the only country that is losing the trade war. They report “similar patterns” in those countries that have imposed retaliatory tariffs, indicating “that the trade war reduces real income for the global economy as well.”

An often-stated goal of the Trump tariffs was to reduce the cost of intellectual property (IP) theft by the Chinese, thievery that the administration said cost $225 billion, not including other types of IP theft that could run the cost up to as much as $600 billion. If, instead of a trade war, the United States and China had negotiated a 25% increase in IP royalties, it would take three years to pay off 2018’s $1.4 billion loss to U.S. consumers’ real income.

Another of the administration’s goals in imposing tariffs was to increase the number of U.S. manufacturing jobs. There is a cost for those jobs as well:

[I]f 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 deadweight welfare loss per job saved is $195,000, which is almost four times more than the annual wage of a steel worker: $52,500. These benchmarks suggest that the costs of the trade war are quite large relative to optimistic estimates of any gains that are likely to be achieved.

The report’s authors say that “the costs of the trade war are quite large relative to optimistic estimates of any gains that are likely to be achieved.”

The evidence indicates that trade wars are not good nor are they easy to win as the president has claimed. And the longer they go on, the less winning we are likely to see.

The full paper, “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” by Mary Amiti, Stephen J. Redding, and David Weinstein is available online.