Say this for Donald Trump: He’s provided us with many iconic quotations, which will surely be repeated in histories and textbooks for decades if not generations to come. Unfortunately, they’ll be repeated because they are extremely clear examples of bad ideas.
In economics, the line you hear most is Trump’s declaration that “trade wars are good, and easy to win”. Coming in second is his assertion that “I am a Tariff Man”, coupled with the claim that foreigners pay the tariffs he has been imposing.
Now, that last claim is something you can test. Over the course of 2018 Trump imposed tariffs on about 12 per cent of total US imports, and many of those tariffs have been in effect long enough that we can get a first read on their consequences.
Economists from Columbia, Princeton, and the New York Federal Reserve released a paper, “The impact of the 2018 trade war on US prices and welfare”, that used detailed import data to assess the tariffs’ impact. The conclusion: to a first approximation, foreigners paid none of the bill, US companies and consumers paid all of it.
And the losses to US consumers exceeded the revenue from the new tariffs, so the tariffs made America poorer overall.
How did they get this result? The US government collects data on the prices and quantities of many categories of imports. Many of these categories faced new tariffs, but many others didn’t. So you can compare what happened to the tariffed imports to the de facto control group of untouched imports; this tells you the impact of the tariffs.
Under Trump’s vision, in which foreigners would have paid the tariffs, what you would have expected to see is falling prices for tariffed goods, offsetting the tariff, so that consumer prices didn’t change. What you actually see, however, is no visible effect of the tariffs on import prices.
So foreign suppliers don’t seem to have absorbed any of the tariffs, which were fully passed on to consumers; tariff-inclusive prices have risen by the full amounts of the tariffs.
These price hikes led to substantial changes in behaviour. Imports of the tariffed items fell sharply, partly because consumers turned to domestic products, but also in large part because importers shifted their sourcing to countries that aren’t currently facing Trump tariffs. For example, a number of companies already seem to have begun buying goods they previously bought from China from Vietnam or Mexico instead.
These changes in behaviour are the key to the paper’s conclusion that the tariffs have made America poorer.
Consider the following example: pre-tariff, the US imports some good from China that costs $100. Then the Trump administration imposes a 25 per cent tariff, raising the price to consumers to $125. If we just keep importing that good from China, consumers lose $25 (Dh91.8) per unit purchased — but the government raises an extra $25 in taxes, leaving overall national income unchanged.
Suppose, however, that importers shift to a more expensive source that isn’t subject to the tariff; suppose, for example, that they can buy the good from Vietnam for $115. Then consumers only lose $15 — but there is no tariff revenue, so that $15 is a loss for the nation as a whole.
But what if they turn to a domestic supplier — say, a US company that will sell the product for $120. How does this change the story?
Here the crucial thing is that producing a good domestically has an opportunity cost. The US is near full employment, so the $120 in resources used to produce that good could and would have been employed producing something else in the absence of the tariff. Diverting them into producing what we used to import means a net loss of $20, with no revenue offset.
By the way, in practice any manufacturing jobs added by the Trump tariffs are probably offset by losses of other manufacturing jobs. Partly that’s because most of the tariffs are on intermediate goods — inputs into production, so that job gains in, say, steel are offset by losses in autos and other downstream sectors.
Beyond that, the tariffs have probably contributed to a rising dollar, which makes US exports less competitive.
Putting it all together, the Trump tariffs have raised consumer prices, rather than depressing foreign earnings. Some revenue has been gained, but there has also been what amounts to tax avoidance as consumers turn to other, untaxed sources of what we used to import.
But this tax avoidance itself comes at a cost, so the US as a whole is left poorer.
Now, the numbers aren’t that big. The new paper puts the net welfare loss at $1.4 billion a month, or $17 billion a year; that’s less than 0.1 per cent of US GDP.
But winning it isn’t. And the numbers could get a lot bigger if the trade war expands, say with a “national security” tariff on European cars.