This is the executive summary of the AIER report “The Trade War: A One-Year Assessment.” Read the full report here.
“I am a Tariff Man,” tweeted President Donald J. Trump on December 4, 2018, putting a strange exclamation point on a year in which the President followed through on the protectionist rhetoric he cultivated since the 2016 campaign. Making good on this campaign promise, however, harmed virtually all Americans while failing to positively impact the industries supposedly being protected.
President Trump’s aggressive use of tariffs in 2018 made clear that he did not view international trade through the lens of commerce, where thousands or even millions of individuals and firms do business. Instead, world trade was about negotiation, with world leaders using carrots and sticks to regulate commerce between their citizens and the strongest and shrewdest leaders coming out on top.
Anyone who maintains that a $75 billion income tax cut helps the economy must also agree that a tariff hike of $45 billion or more must harm the economy. This study looks back on the unprecedented developments in international trade that happened in 2018.
While economists across the political spectrum often disagree on the most fundamental policy questions, they almost uniformly oppose protectionism. At the time of this writing in March 2019, the data showing the damage this trade war has done are starting to come in.
Amiti et al (2019) report statistical evidence that the 2018 tariffs and retaliatory measures taken by U.S. trading partners have increased both input and final consumer prices, disrupted global supply chains, and resulted in deadweight loss of billions of dollars over and above the tens of billions of dollars in new taxes filling government coffers. Fajgelbaum et al (2019) reach similar conclusions about the volume of global trade and losses to the U.S. economy.
We take a higher-level view to understand in the most basic terms the mechanisms by which the 2018 tariffs have directly harmed American consumers and firms. After a summary of the actions taken by the Trump Administration and foreign governments in retaliation, we turn to what has been lost due to the tariffs, and what if anything has been gained. We find that:
- The 2018 tariffs directly claw back a quarter or more of the savings American households and firms realized from the 2017 cuts in individual and corporate tax rates.
- U.S. importers passed a large portion of the new tax burden they directly faced onto consumers.
- While protectionists claim that tariffs are necessary to shield important domestic industries from competition, data from the steel and aluminum industries provide no evidence that these sectors have realized any gains.
Tariffs are sometimes politically easier to swallow than other tax increases because the costs seem indirect and diluted throughout the economy while the supposed benefits seem more direct and carry a degree of sympathy. Our analysis shows that this intuition is flat wrong. Tariffs cost American households and firms billions, and fail to provide help to ailing industries promised by their proponents.