At Work

New China Tariffs Increase Costs to U.S. Households

Several studies, including this one, demonstrate that raising the cost of goods (in this case via tariffs) also raises consumer prices and/or reduces demand because of higher prices.

If the cost to produce a good or provide a service is increased for any reason, say forced wage increases, won’t the same thing occur? If a firm is unlikely to absorb from its income and profit a 10% tariff why would it do so with a ten percent wage increase absent increased productivity?

The magnitude of these costs depends on how a tariff affects the prices charged by foreign exporters and the U.S. demand for imported goods. Studies, including our own, have found that the tariffs that the United States imposed in 2018 have had complete passthrough into domestic prices of imports, which means that Chinese exporters did not reduce their prices. Hence, U.S. domestic prices at the border have risen one‑for-one with the tariffs levied in that year. Our study also found that a 10 percent tariff reduced import demand by 43 percent.

U.S. purchasers of imports from China must now pay the import tax in addition to the base price. Thus, if a firm (or consumer) is importing goods for $100 a unit from China, a 10 percent tariff will cause the domestic price to rise to $110 per unit. This adds a $10 cost per unit for buyers of imports, but it is not a true cost for the U.S. economy because the money is simply transferred from buyers of imports to government coffers and thus could, in principle, be rebated.

Source: New China Tariffs Increase Costs to U.S. Households – Liberty Street Economics

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Categories: At Work, Government, Politics

8 replies »

  1. Everyone needs to remember there are lies, damn lies and statistics. I have seen very little cost increases caused by the tariffs at the consumer level, ie – low inflation numbers coming from the government. I read last year that the tariffs would cause a 25% increase in appliance prices, but I see sales all the time with up to 40% discounts off list prices of washer / dryer sets. I enjoy purchasing products from Hong Kong on Ebay. I just purchased a leather watch band with butterfly clasp for $15 with free shipping. If it was made in the USA, I am sure it would of costs $50. I like having $35 left in my pocket to spend or save for another day. Cheap imports from all over the world make us all richer, not poorer.

    Here is something to think about, from business insider –

    Here’s what 5 of your favorite products would cost if they were made in the US.

    https://www.businessinsider.com/how-much-products-would-cost-if-made-in-us-2016-11

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  2. I agree with that last statement about the lawn gnomes. I know nothing about economics or any of this. But I do go to Walmart and see the cheap junk people fill their carts with and waste their money on. I assume a lot of it comes from China. If prices go up it might be a good thing. I am just your average American skeptical of all studies that predict doom and gloom. I enjoy reading the comments on this site.

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  3. There are at least three things that leave me skeptical of the veracity and reliability of this “study”.

    1. A tariff is indeed a tax. However, it is grossly superficial to assume (as this “study” does) that ALL of the cost of that tax is borne by the U.S. final consumer – ignoring any possibility of tariff cost absorption by raw materials suppliers, shippers, manufacturers, more shippers/handlers, and all others involved in the entire supply chain of product creation/delivery PRIOR to reaching the U.S.

    2. From the text: “Thus, if a firm (or consumer) is importing goods for $100 a unit from China, a 10 percent tariff will cause the domestic price to rise to $110 per unit. This adds a $10 cost per unit for buyers of imports …”
    Tariffs are calculated/imposed on the Dollar-cost of imported goods, NOT on the Count-of-units of goods, as this example states. What if the Chinese exporter agrees to absorb ALL or even part of the added tariff cost by delivering 110 UNITS of its product for the same $100 it used to charge for 100 units? Although the “importer” still has to write the tariff/tax check of $10, she is receiving 10% more units to sell (at profit), resulting in no added cost to either the U.S. importer, retailer or final consumer.

    3. From the text: “Our study also found that a 10 percent tariff reduced import demand by 43 percent.”
    I see no evidence that import demand from China has dropped at all, let alone by the 43% (nearly half) claimed by these “researchers”. Quite the contrary is true, in fact. The import/export “trade deficit” with China has remained stubbornly high. And during some periods since the initial 2018 imposition of tariffs, has actually increased. A portion of the increase in imports has been attributed to “extra ordering” prior to the imposition dates of tariff increases, and that is quite possible. But there is NO indication of sustained demand reduction for Chinese imports. Nor is there any indication of price inflation, which would nominally be detected as such IF prices increased by “$414 per household” with no attendant increase in consumption, as these “researchers” assert.

    So, with no actual measured decrease in imports, no measurable decrease in “demand” (let alone 43%), and no measured increase in inflation – as would be the case if prices of consumer goods increased by 10% without an increase in quantity of goods purchased – this “study” seems to have no supporting evidence.

    In short, this “study” is a grossly superficial, static arithmetic exercise based on the defective assumption that the U.S. Consumer is bearing ALL of the costs of the imposed tariffs. And the defective nature of that assumption is proven by the facts that U.S. imports from China have not decreased, U.S. Consumer demand has remained high, and U.S. consumer goods inflation remains low.

    I am not necessarily a supporter of tariffs in general. But I do not fear these in particular, in terms of their impact to the U.S. economy, as these “researchers” seem to want me to.

    What I do fear, is that this sort of superficial, static “analysis” is passed off as “research” or “studies” by an institution as influential as the New York Fed. That gives me great pause.

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    • According to the Associated Press (7-12-2019), Chinese imports of US goods are down 31.4% from a year before. Us imports from China are down 7.8% but the Chinese trade surplus grew by 3%. I don’t know where these figures come from but it is not 43% however, it is clear that American jobs are at risk from China not importing American goods, but Americans are still importing Chinese goods at a slight reduced rate but still the surplus is growing.

      I am wondering what how this study is biased or are the AP stats flawed. Either way, it appears that the trade war is risking American jobs more than Chinese jobs.

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      • The current historically low U.S. Unemployment Rate statistics, in conjunction with the rising U.S. Labor Participation Rate, contradicts your conclusion that the “trade war is risking American jobs more than Chinese jobs”.

        Like you, I also don’t know where those AP numbers come from. But with overwhelming contradictory evidence from the likes of the Bureau of Labor Statistics, the Bureau of Economic Analysis, as well as other U.S. State Department import/export data, I find those numbers as well as the conclusions highly suspect.

        Again, I acknowledge that tariffs are just an additional tax and I do not necessarily support any additional tax load on production/exchange. I am a devout capitalist and an equally devout supporter of unencumbered international trade. But I’m also savvy enough to understand that assessing the impacts of ANY tax or tariff, imposed by any governmental entity, at any point in the production/delivery chain, requires rigorous dynamic analysis, not just a simple static arithmetic treatment of some (highly suspect?) numbers.

        And it’s not just your conclusion that is demonstrably flawed. Consider the final line of the last (summary) paragraph of the alleged “research” of the New York Fed: “In sum, according to our estimates, these higher tariffs are likely to create large economic distortions and reduce U.S. tariff revenues.” That final “In sum” conclusion actually made me chuckle – when ALL other available evidence indicates otherwise. But I fully understand this conclusion, given the pathetic, superficial, static-analysis nature of their “research”.

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  4. The Chinese are being accused by the U.S. of devaluing the yuan, which China strenuously denies. If true it reduces some of the damage a U.S. tariff imposes on them. On the other hand, blah, blah, blah etc. And so on.

    It’s called the dismal science for a reason.

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  5. I am not totally on board with the trade war. However, another way to look at this is that for China to make things cheaper than the US, then either regulations or labor must be cheaper because the raw materials costs should be the same. For decades, the US labor market has been in a race to the bottom or in other words, to same wage level as cheapest labor in the world. When America could not get its labor as cheap, it lost the jobs overseas. Will this trade war level the playing field? Is it the right thing to do? I don’t know.

    The positive thing might be that people will stop buying things they really do not need. How many lawn gnomes do you need? Just maybe they will have money leftover to save for retirement now and the democrats and republicans will one day work together again.

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