Cumberland Advisors Market Commentary – The Trade Policies

Author: Robert Eisenbeis, Ph.D., Post Date: January 14, 2020
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Beginning in 2018, in a long sequence of actions, the US enacted tariffs on goods from a number of countries besides just China. In some cases the affected countries responded with their own retaliatory tariffs on US products.

Cumberland Advisors' Robert "Bob" Eisenbeis, Ph.D.

As a consequence of the timing and the short periods that many of the tariffs have been in place, the data available to assess the tariff impacts are relatively limited in terms of the products impacted and other economic factors like consumption and employment. The scope and scale of the tariffs have been large, with a total of over 20,000 products (12,043 imports and 8,073 exports) amounting to over $400 million in goods being impacted [4](I)(II). Because of this, there has been a recent explosion of research designed to assess the impacts that the recent series of tariff restrictions and changes have had on various segments of the US economy.

The purpose of this commentary is to summarize what the most current research shows the impacts of the 2018–2019 tariffs to be. No attempt is made to assess the wisdom of the current tariff policies; our aim is instead to provide evidence in an effort to improve the quality of the debate. We purposely do not review the past historical work on tariffs and instead concentrate on empirical work completed and/or published during 2019 in order to consider only the most recent evidence on the current round of tariffs. In addition, we only discuss research conducted by academic researchers and those from policy-neutral organizations like the Federal Reserve System. The unique feature of most of this work is the large micro-time series data sets employed, which cover a large number of products on either a weekly or monthly basis. Finally, the work by necessity looks at the short-term impacts. Some of the work also attempts to project longer-term impacts using econometric models; however, the results are mainly suggestive and not as definitive as the short-term results are. The work focuses on three primary impact channels: efforts to provide protection for domestic industries, impacts of increasing costs for imported inputs to production, and competitive effects of retaliatory tariffs on both domestic and overseas markets.

The current tariff “war” began on January 23, 2018, when the US imposed a 30% tariff on solar panels and 20–50% tariffs on washing machines. China is the leading producer of solar panels and is also the largest exporter of washing machines to the US, followed by Mexico and South Korea. The first study of the current round of tariffs focused on washing machines and has probably the longest data series to date on a single good [7](III). Through December 2018 the authors found that the US tariffs resulted in an 11% increase in the price of washing machines and, interestingly, an 11% increase in the price of dryers, which are complementary goods, even though there were no tariffs imposed upon dryers. This percentage translates into an estimated $86 increase in the price of washers and a $92 increase in the price of dryers, or about $1.5 billion annually. Interestingly, the price increases were not limited to imports: The prices of domestically produced brands also increased from 5% to 17%. As a result of the tariffs, the domestic production of washing machines increased, resulting in job growth within the US, but at a cost. Comparing the increased tariff revenues on about $82 million netted against the increased cost to consumers of washing machines, the authors estimated that the net tariff-adjusted costs were about $817K per job annually[7].

Subsequent studies have taken a broader look at the impacts of US tariffs in an attempt to determine (a) the effects on prices paid by US consumers, (b) the impacts on goods prices resulting from retaliatory tariffs, (c) the distribution effects of tariffs on industries and sections of the country, (d) the impacts on domestic employment, and (e) the costs to producers to reorganize supply chains to utilize potentially cheaper sources (termed dead-weight loss). Each of these is considered below.

All of the studies reviewed that considered the impacts of tariffs on imported goods prices concluded that the tariff costs imposed by the US were nearly 100% passed on in the form of higher costs and were absorbed in part by importers and in part by U.S. consumers, but were not paid by goods exporters to the US [1,2,3,4,5,6,7](IV). It was estimated that imports of varieties (goods and their close substitutes) declined by about 32% while imports of those goods specifically targeted by tariffs declined by about 2.5%. In dollar terms, imports declined about $51 billion, or about 0.27% of GDP.[4] To be sure, some domestic producers did benefit from the tariff protections, but those gains appear to have been offset by losses to other producers.
When retaliatory tariffs were put in place, especially those imposed by China, US exports on those goods exposed to tariffs were reduced about 75%, of which China accounted for about 50–60%, or about $15 billion through the end of 2018 [5]. But on balance, considering both the gains to protected producers and costs due to higher import costs, there was a net loss to the US of about $7.2 billion, or 0.04% of GDP, which in the aggregate is small relative to the size of the US economy [5]. In terms of incremental costs to consumers, it is estimated that the 2018 tariffs increased costs to consumers in two ways – the increase in prices cost $282 per household annually, and efficiency losses added an additional $132 per household for a total of $414 per household per year [1]. The proposed additional 2019 tariffs on another $200 billion of goods are estimated to cost an additional $831 per household per year [1]. On a more micro level, a study comparing the effects of China’s retaliatory tariffs on economic outcomes at the county level found evidence of significant negative effects on consumption, employment, and exports for those counties with relatively higher production of goods that were exposed to the tariffs compared to counties with low exposure. The quantitative estimates implied a negative impact on consumption of from minus $20 billion to minus $54 billion and a reduction in consumption per worker of from minus $630 to minus $1600 based upon model confidence intervals.[10] One clear conclusion is that tariffs had distributional impacts, with both winners and losers being impacted, and the losses were broad-based but disproportionately affected the Midwest due to retaliatory tariffs. [4]
Two other current studies also addressed the impacts of the tariffs on employment and wages [6,9]. One of these studies focused on the impacts of the tariffs on manufacturing, and the results suggested that, on balance, employment was negatively impacted and was down about 1.4% [6]. The other study estimated that employment was negatively impacted by about 199,000 full-time jobs and that the imposition of retaliatory tariffs cost an additional 41,000 jobs [9].

The work so far suggests that the current round of tariffs and the retaliatory responses have imposed numerous costs on US consumers and our economy in the form of higher prices, welfare losses, and reduced employment. Virtually every county in the US has been negatively impacted in some way [4,10]. Also, there is evidence that the counties that have been most negatively impacted by retaliatory tariffs were specifically targeted for political reasons by the foreign countries that applied the tariffs on US exports [5]. Furthermore, the areas most impacted were in the central Midwest [5]. Admittedly, the work so far has by necessity focused on the short-term impacts of the tariffs, and we will have to wait to see what the second- and third-round effects ultimately turn out to be as producers and importers adjust their supply chains and develop new markets for goods. The one positive is that the overall quantitative impacts on GDP are small to date because trade is a small portion of GDP and the affected goods are a small portion of that trade. However, this fact in no way minimizes the significance of the costs to those firms whose markets have been disrupted or destroyed or to the citizens who have lost their jobs.

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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To ensure that we have not missed important work on tariffs, we encourage readers to send unbiased references and papers that can be incorporated into updates of this initial tariff assessment.

  1. (1.)Amiti, M., S. J. Redding, and D. Weinstein (2019a): “The Impact of the 2018 Trade War U.S. Prices and Welfare,” Working Paper 25672, National Bureau of Economic Research.
  2. (2.)Amiti, M., S. J. Redding, and D. Weinstein (2019b): “New China Tariffs Increase Costs to U.S. Households,” Liberty Street Economics, Federal Reserve Bank of New York, May 23, 2019, https://libertystreeteconomics.newyorkfed.org/2019/05/new-china-tariffs-increase-costs-to-us-households.html.
  3. (3.)Cavallo, A., G. Gopinath, B. Neiman, and J. Tang (2019): “Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy,” Working Paper 26396, National Bureau of Economic Research.
  4. (4.)Fajgelbaum, Pablo D., Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal. 2019. “The Return to Protectionism,” National Bureau of Economic Research Working Paper 25638.
  5. (5.)Fetzer, Thiemo and Carlo Schwarz, “Tariffs and Politics: Evidence from Trump’s TradeWarsk,” CESIFO Working Paper 2019-7553 (online publication), October 2019.
  6. (6.)Flaaen, A. and Justin Pierce, “Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector,” Finance and Economics Discussion Series, Divisions of Research and Statistics and Monetary Affairs, Federal Reserve Board, 2019-086.
  7. (7.)Flaaen, A. B., A. Hortac¸ and F. Tintelnot (2019): “The Production Relocation and Price Effects of U.S. Trade Policy: The Case of Washing Machines,” Working Paper 25767, National Bureau of Economic Research.
  8. (8.)Thiemo Fetzer and Carlo Schwarz, “Tariffs and Politics: Evidence from Trump’s Trade Wars, CESIFO Working Paper No. 7553, October 2019.
  9. (9.)York, Erica, “Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions,” Tax Foundation, December 16, 2019, https://taxfoundation.org/tariffs-trump-trade-war/.
  10. (10.)Waugh, Michael, “The Consumption Response to Trade Shocks: Evidence from the US-China Trade War, NBER Working Paper 26353, National Bureau of Economic Research, December 2019.
(I) For a detailed breakdown of the series of tariffs imposed by the US, see https://en.wikipedia.org/wiki/Trump_tariffs.
(II) The retaliatory tariffs have on agricultural products have been well documented, but there has been little academic research looking specifically at the impacts that we have been able to discover.  Therefore, the impacts of those tariffs are not discussed at this time.
(III) The authors note several advantages of focusing on washing machines, including the nature of the product, the fact that there was a clear complementary good in the form of dryers, and the relative concentration of production in only a few countries [6].
(IV) The studies differ to some extent as to the split between how much of the costs were absorbed by importers and how much was passed on to consumers. The differences are explained in part by differences in the goods that were targeted, the availability of substitute goods, the extent to which the targeted products were inputs to the production of final goods as opposed to final goods themselves, and the degree to which producers could change production facility locations to avoid the tariffs.

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