It is theoretically feasible that if we impose import tariffs then those selling to us are so discombobulated that they lower their prices – and profit margins – in order to be able to carry on selling to us. The more inelastic supply is – the less it varies in response to price changes – the more this will be so. It is also possible that it is demand that is inelastic. That what we’re willing to buy doesn’t change much with price. In which case the tariffs will be added onto what we pay and they will reduce consumer welfare.
This means we’ve an empirical question here. Which is it that actually happens with Trump’s tariffs upon Chinese goods?
This paper explores the impacts of the Trump administration’s trade policy on prices and welfare. Over the course of 2018, the U.S. experienced substantial increases in the prices of intermediates and final goods, dramatic changes to its supply-chain network, reductions in availability of imported varieties, and complete passthrough of the tariffs into domestic prices of imported goods. Overall, using standard economic methods, we find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018. We also see similar patterns for foreign countries who have retaliated against the U.S., which indicates that the trade war also reduced real income for other countries.
Oh. From the conclusion:
Economists have long argued that there are real income losses from import protection. Using the evidence to date from the 2018 trade war, we find empirical support for these arguments. We estimate the cumulative deadweight welfare cost (reduction in real income) from the U.S. tariffs to be around $6.9 billion during the first 11 months of 2018, with an additional cost of $12.3 billion to domestic consumers and importers in the form of tariff revenue transferred to the government. The deadweight welfare costs alone reached $1.4 billion per month by November of 2018.
The trade war also caused dramatic adjustments in international supply chains, as approximately $165 billion dollars of trade ($136 billion of imports and $29 billion of exports) is lost or redirected in 23 order to avoid the tariffs. We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters. We also find that U.S. producers responded to reduced import competition by raising their prices.
Note that last bit, nota bene. All the tariffs end up being added to consumer prices. It’s a tax raise upon Americans that is. But to add onto that again we’ve got to tot up the effects upon American consumers of American producers also raising their prices.
Trade wars and trade tariffs are a bad idea.