Recent scholarly research has validated concerns about the comprehensive absorption of costs associated with the number of trade spats in which the United States is now engaged. That research implies that American firms and households are paying a $3-billion-per-month increase in costs caused by trade policy, in addition to absorbing roughly $1.4 billion in welfare losses associated with the policy shift on trade. In addition, if these polices are sustained or expanded, an expected $165 billion in investment will be redirected away from the United States and China, imposing large costs on companies that have constructed related supply chains over the past two generations.
Over the past few weeks, it has become clear that the probability of a near-term deal to roll back the impact of trade conflicts is falling. The escalation of the U.S.-China trade conflict alone, once a new 25 percent tariff on $250 billion of imports takes effect, is the equivalent of a $62.5 billion tax increase to be borne by American firms and consumers.
Over the past few weeks, it has become clear that the probability of a near-term deal to roll back the impact of trade conflicts is falling. The escalation of the U.S.-China trade conflict alone, once a new 25 percent tariff on $250 billion of imports takes effect, is the equivalent of a $62.5 billion tax increase, to be borne by American firms and consumers.
The White House over the past weekend announced that the administration will shortly be releasing a document containing an additional $300 billion worth of tariff lines on Chinese imports. If the administration follows through on its intent, and given its track record, we anticipate that this would be equivalent to a $137.5 billion tax hike on the commercial sector and domestic households.
Section 232 and auto import tariffs
May 18 is the first possible date that the administration legally can announce the use of power under Section 232 of The Trade Expansion Act of 1962 to slap tariffs on imports all foreign vehicles and autos parts. That would represent a possible set of import taxes on an additional $350 billion worth of goods at 25 percent, or roughly $87.5 billion in new taxes on the domestic economy.
Once one accounts for the direct impact outlined above and estimates the indirect impact ensuing symmetrical retaliation from China, at a minimum there could be an increase of $200 to $225 billion in taxes. Should the administration move on these auto import tariffs, then accounting for retaliation by Japan, the United Kingdom and the European Union, it is possible that during the second half of 2019, the domestic economy will have to absorb $335.8 billion increases in taxes.
The more benign scenario would include shaving off two-tenths of a percent off gross domestic product in 2019, whereas the expanded trade conflict would shave 0.5 percent. At this time, since we did not assume that the trade spat with China would be resolved, we are holding to our 2019 GDP forecast of 1.8 percent. Should the administration widen the conflict to include the aforementioned economies and industrial ecosystem, we will revise our estimate.
Who pays the costs of protectionist trade policy?
For the past year, we have made the case that the current series of trade conflicts in which the United States is ensnared are lose-lose propositions. Our primary concern was the disruption of global supply chains that have been constructed over the past 25 years and the transmission mechanism of financial markets. We now have the numbers to prove it.
According to a new study published by the Centre for Economic Policy Research, the “U.S. experienced substantial increases in the prices of intermediates and final goods, large changes to its supply chain network, reductions in availability of imported varieties, and complete pass through of the tariffs into domestic prices of imported goods.” Elasticities and currency volatility did not mitigate the costs for firms and U.S. households. Let us be clear here: a “complete pass through” indicates that the costs of the tariffs were not absorbed by the exporters through reduced export prices; the Chinese have not borne the direct cost of the tariffs.
Instead, U.S. consumers bear the brunt of the impact in the form of higher product prices, creating a transfer of wealth directly from U.S. consumers to the government, having absorbed the $75 billion of tariffs collected at the ports of entry in the first three months of 2019; that’s roughly equal to 3.6 percent of all federal revenue taken in during that time. As those tariffs increase, one should expect that tax to affect spending decisions of U.S. households, leading to a slowdown in consumption and reduced economic output and opportunity.
To provide context, consider the case of the import tax on washing machines. A recent Federal Reserve study found that the 2018 imposed tariffs resulted in a 12 percent increase in the price of washers and caused an increase in the cost of dryers. While the federal government collected more revenues from importers, those costs were passed along to consumers; the economic estimate found that consumers paid an additional $1.5 billion via higher prices, or roughly 20 times more than was collected in revenues from higher import taxes.
Look for a more comprehensive story on tariffs in the June edition of The Real Economy.