U.S. President Donald Trump listens during a Celebration of Military Mothers event in the East Room of the White House in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Trump’s China Tariffs Hit America’s Poor and Working Class the Hardest

(Bloomberg Businessweek) -- To understand today’s trade war better, turn the clock back a couple of years. President-elect Donald Trump was getting ready to move into the White House, and President Barack Obama was packing to move out, on Jan. 12, 2017, when three economists on Obama’s team fired a parting shot against protectionism. They published an article on the website Vox headlined “US tariffs are an arbitrary and regressive tax.” 

Rich people pay more in tariffs than poor people, but that’s because they buy more stuff in general, wrote Jason Furman, the outgoing chairman of Obama’s Council of Economic Advisers, along with Jay Shambaugh, a member of the council, and Katheryn Russ, a staff economist.

It’s the people down the income scale who feel the pain of tariffs the most, they wrote. As of 2014, households in the top tenth of pretax income spent less than 0.3% of their after-tax income on tariffs whose costs were embedded in the prices of products they bought. For households in the bottom tenth of pretax income, more than 1.5% of their after-tax income went toward tariffs, the authors found.

Trump’s China Tariffs Hit America’s Poor and Working Class the Hardest

That was in the era of free trade, before Trump started raising duties on imports from China and elsewhere. Today, all classes of Americans pay more for tariffs. But the burden is still proportionately heavier on the poor, Russ, a professor at the University of California at Davis, says in an interview.

Lower-income consumers tend to spend a lot of their money on low-priced apparel and other items imported from China. On the other hand, Russ says, higher-income people spend a lot on high-end consumer electronics that are also from China. The biggest reason tariffs pinch the poor the most, says Russ, is that the poor have less of a cushion: A higher share of their incomes goes for consumption of all kinds. The rich save a higher share of theirs.

Trump’s Council of Economic Advisers, chaired by Kevin Hassett, is more pro-tariff than Obama’s was, yet even Trump’s advisers have acknowledged the downsides. The Economic Report of the President for 2018 says tariffs raise prices for consumers. The relevant paragraph appears on page 496 of the report [PDF]:

Tariffs provide benefits as well as costs. The Federal government benefited from $14.4 billion in revenue collected in 2018 from newly imposed tariffs. Revenue was historically a major impetus for tariff policy, though it has not been one for more than a century (Irwin 2017). In addition to this revenue, domestic producers also stand to benefit from price increases supported by tariff protections. Offsetting these benefits are the costs paid by consumers in the form of higher prices and reduced consumption. Foreign exporters also bear some of tariffs’ economic incidence, although the extent varies across products. The foreign incidence is smallest for substitutable products such as commodities.

How tariffs affect different strata of society is only part of the story. Another matter to consider is the tariffs’ impact on Americans vs. Chinese. If American consumers can easily switch from tariffed products, then they won’t bear much of the burden. On the other hand, if there are no ready substitutes for the imports from China, Chinese exporters will have the upper hand.

On May 13, Trump tweeted that Chinese exporters would absorb most of the brunt of higher U.S. tariffs. He wrote, “This has been proven recently when only 4 points were paid by the U.S., 21 points by China because China subsidizes product to such a large degree.” That’s an accurate summation of a policy brief [PDF] last year by Benedikt Zoller-Rydzek and Gabriel Felbermayr for the European Network for Economic and Fiscal Policy Research. Zoller-Rydzek is a senior researcher and lecturer at ZHAW School of Management and Law in Winterthur, Switzerland, while Felbermayr is president of the Kiel Institute for the World Economy at Kiel University in Kiel, Germany. 

It’s safe to say that the report Trump tweeted about represents a minority opinion. Most economic studies have found that American consumers bear most of the brunt of the higher tariffs on imports from China because importers pass along all or almost all of the tariffs by raising prices. On May 13, economists at Goldman Sachs Group Inc. cited two recent National Bureau of Economic Research working papers. “First,” Goldman summarized, “the costs of US tariffs have fallen entirely on US businesses and households, with no clear reduction in the prices charged by Chinese exporters. Second, the effects of the tariffs have spilled over noticeably to the prices charged by US producers competing with tariff-affected goods.” That second point is important: When tariffs go up, it gives breathing room to domestic producers to raise their prices to American consumers and make bigger profits. To advocates of higher tariffs, that’s not a bug; it’s a feature.

American exporters suffer when the U.S. increases tariffs on China, and not just because of Chinese counter-tariffs. In 1936, the Russian-born British economist Abba Lerner proposed that when a nation raises duties on imports, its currency will adjust to compensate. Lower demand for imports from the trading partner will depress the value of the trading partner’s currency, assuming markets are operating efficiently. The relative strengthening of the domestic currency will harm exporters, whose goods will become more expensive in foreign markets, Lerner wrote. By his theory, a tax on imports boomerangs back against a nation’s exports.

A pair of economists from Massachusetts Institute of Technology, Ivan Werning and Arnaud Costinot, recently checked to see if Lerner’s theory works in practice. In a 2018 paper they concluded that it mostly does. “As we show,” they wrote in a joint email to me last week, “it remains true under far wider situations than it was originally thought, including in the presence of global supply chains, trade imbalances, market power, sticky prices or wages, behavioral biases, and nonlinear taxes. In this sense, as theoretical results in economics go, it is pretty robust.”

One more piece of research is worth citing. In January the International Monetary Fund published a paper called “Macroeconomic Consequences of Tariffs” that included 151 countries over 1963-2014—in other words, a lot more data than the average academic study includes. Its authors are Davide Furceri, Swarnali A. Hannan, and Jonathan D. Ostry of the IMF and Andrew Rose of the University of California at Berkeley’s Haas School of Business.

The economists undertook the massive project because they were concerned that most defenses of free markets to date had tended to be theoretical, or focused on the micro rather than the macro picture, or outdated. Theirs was empirical, macro, and current. It concluded that free trade really is better: “We find that tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance.”

“I don’t think our research is novel,” says Berkeley’s Rose. “It quantifies stuff.”

 

To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net

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