US-China trade war hurts at home

US importers and consumers have incurred $12.3bn in added tax costs and $6.9bn from reduced imports as a result of the trade war, according to an academic working paper published for the Center for Economic Policy and Research.

The study, entitled The impact of the 2018 trade war on U.S. prices and welfare, estimates that the tariffs imposed on $283bn-worth of imports – accounting for 12% of total US imports – led to “deadweight welfare losses” amounting to $1.4bn per month and $3bn per month in additional tax costs. A welfare loss is based on the idea that consumers reduced their imports, which would otherwise have been purchased at a lower price without tariffs.

The US imposed six waves of tariffs on a number of imports ranging from washing machines to steel and aluminium in 2018. The sixth wave hit hardest when the US levied a 10% tariff on $200bn-worth of Chinese imports. The losses were exacerbated by retaliatory tariffs from China and other countries, which affected about $121bn of US exports.

The US Department of Commerce announced on March 6 that the US trade deficit had hit a 10-year high, jumping 19% in December 2018 to $59.8bn, despite President Trump trying to use the trade war as a means to reduce the deficit.

While there have been suggestions that the US and China are close to finalising a trade deal that would roll back tariffs on at least $200bn of the $250bn-worth of Chinese imports currently taxed by the US, some damage has already been done.

“Our results imply that the tariff revenue the US is now collecting is insufficient to compensate the losses being borne by the consumers of imports,” wrote the study’s authors. “Our estimates, while concerning, omit other potentially large costs, as the new heightened uncertainty about trade policy could itself discourage firms from making the long-term investments that are central to international trade in global value chains.”