What is the real cost of US tariffs on domestic households?
With the effective implementation of the latest round of tariffs (from 10% to 25% on $200bn) approaching, it is instructive to understand how they will ripple through the global economy. Recent work by the National Bureau of Economic Research (NBER) demonstrated that the 2018 tariffs on US imports were completely passed through to end consumers as higher prices. This was corroborated by another study by a team of economists from Chicago and Harvard universities, the IMF, and the Federal Reserve, using price data from the Bureau of Labor and statistics on imports from China. It showed a sharp, nearly one-to-one rise in prices for goods hit by the 10% or 25% tariff, whereas the border price (ex-tariff) was largely unchanged.
As the NBER study argues, part of the costs to households come as tax payments, since the federal government collects those duties at the border and could in theory redistribute them back to households via additional tax cuts or subsidies. The remainder of the costs is deadweight loss, reflecting producers shifting to less efficient and more expensive sources for inputs. These costs are not collected by the federal government and go directly to less efficient firms providing the needed inputs (many of which are unlikely to be domestic firms, as recent studies suggest importers shift to other emerging market countries).
As tariffs continue to rise, these deadweight losses are expected to rise faster since the higher tariffs incentivise importers to shift more and more to less efficient sources, thereby bypassing federal coffers. Extending on the NBER study, economists at the IMF determined that the latest round of tariffs would see nearly 75% of their additional costs being deadweight loss. Interestingly, the total estimated costs to US households from the 2018 tariffs and the additional round will now largely equal the tax savings they received of about $1260, as computed by the non-partisan Tax Policy Center. Of course, this analysis does not consider additional tariffs on the remaining roughly $300bn of Chinese imports or other trade barriers like import/export bans.
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