When a senior researcher from the New York branch of the Federal Reserve System and two academic colleagues came out in May with a blog post on the Bank’s website reporting on who really pays the cost of President Trump’s tariffs on huge amounts of U.S. imports from China, they were hardly short of confidence in their answer. And Mr. Trump’s critics eagerly jumped on the emphatic contention that the main victims of the China trade war would be American households, who would get hit with a triple whammy.
Higher consumer prices could result from (1) the levies themselves simply being on to American customers by importers, (2) businesses switching from selling Chinese products to selling more expensive but non-tariff-ed foreign counterparts, and (3) businesses substituting more expensive domestic counterparts for the tariff-ed Chinese goods.
John Carney of Breitbart.com has both done a terrific job of explaining the gaping holes and other flaws in that first New York Fed post (in this piece about the longer work on which it was based), and of reporting that yesterday, the Bank published a follow-on post (by a different team of authors but also bearing the imprimateur of the New York Fed’s Research and Statistics Group) implicitly admitting many of the initial effort’s weaknesses.
Rather than me reproducing or summarizing John’s work (which you can read at the above links), I’d like to try adding some value – by using it and the New York Fed’s own material to show what an unseemly rush to judgment the initial study represented in a clear effort to slime the Trump tariff policies.
Here’s the unequivocal conclusion of that first New York Fed post:
“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. ”
On top of these come the losses of businesses switching to non-Chinese suppliers. This supply chain reorganization produces what economists call “deadweight losses” and these New York Fed authors insisted that they arise “regardless of whether consumers switch to more expensive foreign sources or to a more expensive domestic source.”
The total damage to American households, according to the study? An impressive $831 for each American household each year. So much for President Trump’s claim that his trade war is only hurting China, right?
Well, as a used-car company ad has famously said, “Not exactly.” And the evidence comes from the second New York Fed post – which makes clear just how many uncertainties the first team needed to ignore in order to generate its headline-grabbing claim. Among them:
>”Who pays the tariff tax depends on how it is split between lower profit margins (for wholesalers, retailers, and manufacturers) and higher prices for consumers. Estimating this split is difficult since the distribution of any tax increase on profit margins and prices depends on the details of market structure, such as the number and size of competing firms.”
>”Policy efforts since World War II have been focused on lowering trade barriers. As a result, economists don’t have much data from which to glean insights into how firms respond to tariff hikes.”
>”Affiliates of multinational corporations may be leaving reported import prices unchanged for accounting reasons. In doing so, the multinational would be letting higher tariffs reduce the reported profits of its U.S. operation (rather than those of its Chinese operation).”
These cautionary notes are all entirely valid, but they add up to confessing that economists – including at the New York Fed – don’t have much basis for drawing any firm conclusions about the China tariffs’ impact on American consumers at all. As a result, they raise questions about why the first team never mentioned them, and why no one else at the Bank seems to have brought them up before posting, either.
Just as important, the second New York Fed post mentions several major ways in which China’s economy is taking major body blows from the trade war:
>Chinese entities with narrow profit margins may not be able to lower them further in order to prevent the prices they charge from increasing due to U.S. tariffs, and therefore “may be dropping out of the U.S. market.”
>Many Chinese entities have taken advantage of the post-tariff devaluation of China’s currency and have been able to accept this “loss in competitiveness” in the U.S. market by padding profits on their sales – which should strike everyone as awfully gimmicky. (The latter point is my own conclusion.)
>China has indeed lost market share in the United States, including in sectors that the Chinese government has sought at great expense to promote – like machinery and electronics.
Because the New York Fed is, well, the New York Fed, and its studies are supposed to represent the gold standard of economic research, Googling that first study with “‘New York Fed’ China tariffs consumers May” produces some 79,000 results. It’s true that some of these mention the second study, too – and even note the costs to China. But I can’t help but share Carney’s concern that the first report’s troubling shortcomings won’t attract remotely as much attention.