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.

Casualties of Trade Wars

In 2018, the United States imposed tariffs on steel and aluminum products of 25 and 10 percent, respectively, following an investigation that found that imports of these products posed a national security threat to the United States.  By October of that year, six countries had imposed retaliatory tariffs on $120 billion of US exports, or slightly more than six percent of total US exports.  For example, the European Union announced tariffs on large motorcycles, canoes and sinks; Canada announced tariffs on whiskey, orange juice, steel, and aluminum, among other products. Because retaliatory tariffs such as these can impose significant harm to producers and consumers alike, it is important for policy makers to understand how products are selected for retaliation.

In my most recent working paper with Benjamin Liebman, we develop a political economy model of trade policy to explain a country’s choice of product for retaliation and test the implications of this model using the choices of seven countries in two retaliation episodes: (1) the US imposition of steel and aluminum tariffs in 2018 and (2) the US passage of the Continued Dumping and Subsidy Offset Act (CDSOA) in 2000.  We find that countries are more likely to sanction products with higher trade values and those in which they can extract terms-of-trade welfare, suggesting that trade wars move countries back to a terms-of-trade driven prisoner’s dilemma equilibrium.  We also find a significant amount of heterogeneity in the degree to which US trading partners consider the political importance of the industry when choosing products for retaliation.

Download the most recent version of our working paper.