Distributional Consequences of Trade Wars

The increase in protection between 2018 and 2020, sometimes loosely referred to as the “Trump tariffs,” has been widely criticized by economists.  The protection is extensive in magnitude and breadth, with individual tariffs ranging from 10 to 30 imposed upon products accounting for 50 percent of US consumer imports from China.

In my latest paper, I use data from the Consumer Expenditure Survey to estimate that the Section 301 tariffs on Chinese consumer products cost the average US household at least $145 per year.  Like other consumption-based taxes, these tariffs are highly regressive.  The lowest income consumers pay slightly more than 1 percent of their after-tax income for this trade war, while the highest consumers pay just 0.17 percent of their after-tax income.  In comparison, the Tax Foundation estimated that the 2018 Tax Cut and Jobs Act resulted in a 0.8 percent increase in the after-tax income of the lowest income households, and an increase of 1.5 percent in the after-tax income of the middle three quintiles of consumers.  Note that these estimates likely underestimate the true cost of the new protection, as the values assume that the tariffs had no impact on the prices of non-Chinese producers and exclude the impact of the extensive tariffs on intermediate goods and raw materials, particularly steel and aluminum, which were imposed at the same time.

There has been much discussion of late regarding the need to increase taxes on the wealthiest Americans to make the US tax system fairer.  Policymakers should start by reexamining the massive tariffs enacted over the past three years to eliminate this regressive tax and limit inflationary pressures.