24 Jul Who’s Paying for Tariffs? Click to keep reading…
The economics of tariffs are relatively complicated, and the research conducted in the free trade era may be less applicable today. In 2017, former President Obama’s economists published an article stating that “US tariffs are an arbitrary and regressive tax.’ While the rich pay more in tariffs, because they buy more in general, 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.
Today, it’s more likely, that all Americans are paying more for goods based on the tariff restrictions, but the biggest burden falls on the poor. Lower-income consumers buy more low-cost Chinese goods, and a larger share of their income goes towards consumption of all kinds. 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.
More timely research was recently published (January, 2019) by the International Monetary Fund. A paper called “Macroeconomic Consequences of Tariffs”) included 151 countries over five decades. This study used an empirical and macro approach, and relatively current data. The researchers concluded “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.”
Check out the BusinessWeek article to learn more about the economics of the trade war.