How consumers are footing the bill for the U.S.-China trade war

 
Photo by Cameron Venti via Unsplash
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May 16, 2019

The U.S.-China trade war has been going on in earnest for nearly a year and a half. Much of the conflict centers on tariffs, which are essentially taxes on imported goods — in this case, tariffs on goods the U.S. imports from China. U.S. importers, not Chinese manufacturers, pay tariffs. China has responded by placing tariffs on some products it imports from the U.S., though the U.S. imports far more goods from China than the other way around.

President Donald Trump has led the charge to boost tariffs on foreign goods. He forged his central view on trade wars — that they’re not bad — in the 1980s. The buildup to this trade war began on the presidential campaign trail in early 2016.

Over the past week or so, watching the back-and-forth of the U.S.-China trade war has been a lot like watching a tennis match. First there were trade talks. Then there were more trade talks that ended without a deal. Then, talks halted completely.

Amid all the talk, there was action: On May 10, the Trump administration bumped tariffs from 10% to 25% on $200 billion worth of goods from China. The total value of goods from China that now come with a 25% tariff is roughly $250 billion.

On May 13, China said it would raise tariffs on $60 billion worth of U.S. products, including upping the tariff rate to 25% on nearly 2,500 goods.

On May 14, the Office of the U.S. Trade Representative proposed tariffs up to 25% on the $300 billion worth of Chinese goods that had so far escaped tariffs. To name a few of those goods verbatim from the proposal:

  • Livers of swine, frozen.
  • Textile calendaring or rolling machines.
  • Essential oils of orris.
  • Dishwashing machines of the household type.
  • Fish glue.
  • Chairs for children, including highchairs.
  • Antiques of an age exceeding 100 years.
  • Centrifugal clothes dryers.
  • Prune wine.

The list goes on to the tune of 3,805 goods. If enacted, these new tariffs combined with past tariffs would mean all imports from China would come into the U.S. with some tax.

To be sure, the U.S. likely doesn’t import many items from China that appear on the new list. Computers and electronics – not fish glue — make up the biggest chunk of total U.S. imports from China. They accounted for 34% of the $540 billion worth of goods the U.S. imported from China in 2018, according to Census data. Machinery and apparel were also among the top five imported goods.

The trade war, with no end in sight, got serious in January 2018 when the Trump administration imposed tariffs of 30% on solar panel components and up to 50% on washing machines. China makes most of the world’s solar panels, and the value of U.S. imports of household laundry equipment from China is higher than that of every country except Mexico, Census data shows.

Throughout 2018, Trump put tariffs between 10% and 50% on $283 billion worth of U.S. imports from China, according to a recent working paper from the National Bureau of Economic Research. China hit back in 2018 with tariffs on $121 billion worth of U.S. exports.

In the short term, tariffs of 25% on all imports from China would raise U.S. consumer prices by 0.4 percentage points, according to estimates from the Federal Reserve Bank of San Francisco. In the long-term, tariffs on steel and aluminum imports announced March 2018 are likely to cut U.S. Gross Domestic Product by a quarter percent, according to the Dallas Fed. The European Union, Canada, and Mexico were added to the steel and aluminum tariff list in May 2018, though the Trump administration a year later exempted Canada and Mexico.

Researchers are now starting to analyze the wide-ranging impacts of a trade war with America’s largest goods trading partner that’s now stretching into its second year. Uncertainty is never far behind the twists and turns of this U.S.-China trade war, but at least one thing seems clear: American consumers have ended up footing the bill. Here’s our trade war research roundup on consumer costs, populist rhetoric, and soybeans.

The Impact of the 2018 Trade War on U.S. Prices and Welfare

Amiti, Mary; Redding, Stephen J.; Weinstein, David. NBER. March 2019.

Long-run effects are still shaking out, but U.S. consumers bore the brunt of the 2018 trade war in the short-term, according to this working paper from economists at Princeton University, Columbia University and the Federal Reserve Bank of New York. By November 2018, real income was down $1.4 billion per month, according to their estimates. Real income refers to how much U.S. workers collectively make in wages, adjusted for inflation.

“We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters,” the authors write. “We also find that U.S. producers responded to reduced import competition by raising their prices.”

The Production Relocation and Price Effects of U.S. Trade Policy: The Case of Washing Machines

Flaaen, Aaron B.; Hortaçsu, Ali; Tintelnot, Felix. NBER. April 2019.

Following the washing machine tariffs from early 2018, prices on washing machines rose that year by nearly 12% from a median $749 to $835. Dryers also ended up costing almost 12% more — from a median $809 to $901 — even though there were no tariffs on them, because washers and dryers are often sold together. Three-quarters of the 571 washers studied came with a matching dryer.

U.S. consumer costs increased $1.5 billion because of the price increases brought on in response to the washer tariffs, the authors find. Tariff revenue collected was a fraction of that at $82 million (U.S. importers pay tariffs, not foreign manufacturers. We keep mentioning this because Trump many times has claimed that China pays tariffs).

What happened was that as foreign washing machine producers raised their prices, domestic brands raised their prices too.

“It seems plausible that the firms in our sample chose to split the effects of new tariffs on prices between washers and dryers, maintaining the convention of identical prices,” the authors write.

“I Am a Tariff Man”: The Power of Populist Foreign Policy Rhetoric under President Trump

Boucher, Jean-Christophe; Thies, Cameron G. The Journal of Politics. March 2019.

The authors use the lens of tariff policy to explore the relationship between Trump’s populist rhetoric and social media technology that provides unfiltered communication channels. They open with this understatement: “Americans have not had much experience with a president speaking about the issues of the day the way Trump does on a routine basis.”

It’s true — Trump speaks in a way that diverges from the rhetoric of traditional politicians. Populism spills into his commentary on trade and foreign policy, according to the authors, including a December 2018 tweet that included the phrase, “I am a Tariff Man.”

“The power of populist rhetoric is proportional to its capacity to resonate within society—to its ability to mobilize and shape how people frame issues,” the authors write. To that end, they analyzed 3.39 million tariff-related tweets sent from across the Twitterverse three weeks before and two weeks after March 1, 2018, when the White House announced tariffs on steel an aluminum imports.

Twitter didn’t react much when Commerce Secretary Wilbur Ross told reporters on February 15 that the Trump administration was thinking about imposing steel and aluminum tariffs. Of the roughly 9,500 tweets that day, fewer than 300 cited the tariffs, according to the authors. Then, Trump followed the March 1 tariff announcement with a tweet March 2 that was retweeted more than 20,000 times. Other Twitter users sent 30,000 tweets per hour about the tariffs for most of the rest of the day, according to the authors.

The takeaway from this research? Trump — not the media — drove social reaction to this particular tariff announcement.

“Rather than debate what populism is, or how it differs across regions, we may profit more from a focus on how populist rhetoric structures the debate about important foreign policy issues like trade,” the authors conclude.

The Return to Protectionism

Fajgelbaum, Pablo D.; et. al. NBER. March 2019

During the 2018 trade war, the U.S. raised tariffs from 2.6% to 17% on $303 billion worth of imports, mostly from China, while major trade partners raised tariffs from 6.6% to 23% on $96 billion worth of U.S. exports, according to the authors. Overall, imports from countries the U.S. targeted with tariffs fell 31.5%, while U.S. exports that other countries targeted fell 11%.

The retaliatory tariffs tended to target U.S. industries like agriculture that dominate in areas where people voted Republican in the 2016 presidential elections, the authors find.

“Workers in very Republican counties bore the brunt of the costs of the trade war, in part because retaliations disproportionately targeted agricultural sectors,” the authors write.

Evaluating Potential Long-Run Impacts of Chinese Tariff on US Soybeans

Zhou, Yujun; Baylis, Kathy; Coppess, Jonathan; Xie, Quanting. farmdocDAILY. September 2018.

Professors from the University of Illinois and Purdue University run farmdocDAILY and produce daily agricultural research analysis, but it is not peer-reviewed.

In the summer of 2018, China put a 25% tariff on U.S. soybeans, and China bought half as many tons of U.S. soybeans in 2018 as in 2017. The economic beneficiary of U.S. soybean producers taking a backseat appears to be the world’s other big soybean player, Brazil, according to the authors.

Toward the end of 2018, soybeans from Brazil were $2 more per bushel than soybeans from the U.S., “which is very close to the 25% price difference that would be predicted by the tariff,” the authors write. “This price divergence between the worlds’ two largest soybean producers, U.S. and Brazil, reflects a potential shift in global agricultural trade flow. This premium suggests a growing possibility that China will become more dependent on Brazilian soybeans.”

In part because of slower soybean sales to China, the Trump administration in September 2018 provided a $12 billion bailout to farmers and reportedly wants to provide billions more as soybean exports continue to slip due to tariffs and less demand in China because of African Swine Fever. China’s pig herd has fallen 20 percent since the virus was first reported late last summer, according to the U.S. Department of Agriculture. Farmers in China commonly use soybean meal for pig feed.

Unintended Trade War Winner: Mexico?

One final note: As the graph below shows, Mexico may be an unintended winner of the U.S.-China trade war. The U.S. imported 10% more goods from Mexico last year, the trade deficit between the U.S. and Mexico widened 15% and at least one Chinese company moved production to Mexico to skirt tariffs, according to Bloomberg. Meanwhile, the overall U.S. trade deficit hit a record $891 billion in 2018.

Have some research we should add to this roundup? Let us know.

Check out our other recent economic coverage, including on the market forces behind soaring rents and plunging home values in black neighborhoods in the 1930s, and how Federal Reserve rates helped fuel the investment bust that sparked the Great Recession.

Plus, explore import and export data for your state or locality through USA Trade from the U.S. Census Bureau. Reach out to us if you need help navigating the data.

This article was updated May 17, 2019 to reflect that the Trump administration lifted steel and aluminum tariffs on Canada and Mexico.

 

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