Farmers in the American heartland and owners of Huawei smartphones have good cause to worry about the ongoing trade war with China. But what about the rest of us? Will the 25 percent tariffs on many imported Chinese goods, imposed by President Donald Trump after trade negotiations broke down, have any effect on ordinary Americans?
The Federal Reserve Bank of New York has crunched the numbers and come up with an answer: It calculates the trade war will cost every U.S. household $831 a year.
How did they reach this conclusion? In part, by observing how the 10 percent tariffs
imposed last year played out. The New York Fed's analysis shows those tariffs did not cause Chinese exporters to lower their prices at all. In other words, importers who buy Chinese goods are paying the same prices for those goods that they always have, plus the 10 percent tariffs. And they have passed those higher costs on to consumers in the form of higher prices. "Studies, including our own, have found that the tariffs that the United States imposed in 2018 have had complete pass-through into domestic prices of imports," writes Mary Amiti, an assistant vice president in the N.Y. Fed's Research and Statistics Group in a blog post about the new tariffs' effects.
The N.Y. Fed researchers draw an important distinction between tariff costs and other costs caused by the tariffs. For instance, their research shows that after 10 percent tariffs were imposed in July 2018, importers paid $3 billion a month in tariffs, or what would have been $36 billion over the course of an entire year. But that wasn't the only cost, Amiti writes. In many instances, importers seeking to avoid the tariffs are doing what the Trump administration has suggested and switching to suppliers in countries other than China.
More "dead weight."
But there's a reason so many importers have been buying from China--it's extremely good at efficiently producing quality goods at very low prices. Moving to a different country will likely mean paying more, although not as much as the tariffs. Amiti posits a scenario in which an importer who was buying items from China at $100 apiece before the 10 percent tariff now buys the same items from Vietnam at $109 apiece. For the company (and the eventual consumer), that's a $1 savings per item over continuing to buy from China and paying $110 including the tariff.
As Amiti notes, for the American economy, there's a considerable difference between paying $10 in tariffs, which go into our national coffers, and paying nearly the same amount to a company in a foreign country. The tariff money can be used, at least in theory, to benefit Americans. That theory turned into reality when Trump announced a $16 billion aid package for farmers affected by the trade war--aid that will be funded by tariff money.
On the other hand, when U.S. importers avoid the tariffs by paying higher prices to companies in other countries, that money is no longer available in any form to the U.S. economy. Economists refer to this as dead weight, and according to the N.Y. Fed's research, the 10 percent tariffs cost the U.S. economy $1.4 billion a month in dead weight, along with the $3 billion a month paid in tariffs.
At the higher tariff rate of 25 percent, importers will have a much bigger incentive to choose suppliers outside of China, so as to avoid the tariff. The N.Y. Fed projects many importers who are currently paying the 10 percent tariff will move to suppliers outside China at the new higher rate. Thus, although the tariffs collected will be bigger when importers actually pay them, the N.Y. Fed predicts tariffs collected will drop to $2.245 billion a month, while dead weight costs will rise to $6.594 billion a month. Add those numbers up, divide them by the number of American households, and you get $831 a year. In 2019, with the lower tariffs in place for the first five months of the year (and assuming there are no more changes), that works out to an average cost per household of about $657. In 2020, if the higher tariffs remain in place, it'll be $831.
Needless to say, this is a very broad view that fails to take in a number of factors. For example, the trade war has driven down the Chinese yuan. If it stays low, that could offset some of the tariffs for importers. On the other hand, the trade war has driven down the U.S. stock markets. The N.Y. Fed found that even the 10 percent tariff led to a 43 percent decrease in demand, which suggests a prolonged trade war could slow economic activity in general. These and other factors mean the trade war could either be less painful or more painful than you're expecting. But one way or another, you're likely to feel it.