A recent NBER study found that the full impact of the China tariff falls on domestic consumers, with a reduction in US real income of $1.4 billion per month by the end of 2018. The cost is twofold: an added tax burden and an overall deadweight loss. This piece uses the study to predict the extra cost of the May 2019 increase in tariffs (from 10% to 25% on $200bn of Chinese imports). The tax proportion of the cost actually falls, as consumers are likely to switch to substitute countries for their purchases such as Vietnam. It’s unlikely that spending will be directed to home producers, since studies show that when one emerging country struggles, the others quickly pick up the extra demand. Deadweight loss, however, increases from $132 to $620 per household, tallying up the total cost to $831.
Why does this matter? Revealing the imminent cost to households makes all too real the impact of the trade war. Additional tariffs are clearly damaging given the huge efficiency loss and this should be part of Trump’s considerations, especially given his re-election ambitions.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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