[[{“value”:”In Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector (forthcoming) Aaron Flaaen and Justin Pierce of the Federal Reserve Board write: The unprecedented increase in tariffs imposed by the United States against its major trading partners in 2018-2019 has brought renewed attention to the economic effects of tariffs. While
The post Tariffs Hurt Manufacturing appeared first on Marginal REVOLUTION.”}]]
In Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector (forthcoming) Aaron Flaaen and Justin Pierce of the Federal Reserve Board write:
The unprecedented increase in tariffs imposed by the United States against its major trading partners in 2018-2019 has brought renewed attention to the economic effects of tariffs. While vast theoretical and empirical literatures document the effects of changes in trade policy, it is not clear how prior estimates apply when there are virtually no modern episodes of a large, advanced economy raising tariffs in a way comparable to the U.S. during this period. Further complicating estimation of the effects of tariffs is the rapid expansion of globally interconnected supply chains, in which tariffs can have impacts through channels beyond their traditional effect of limiting import competition.
Another important feature of these tariffs is that they were imposed, in part, to boost the U.S. manufacturing sector by protecting against what were deemed to be the unfair trade practices of trading partners, principally China. Thus, understanding the impact of tariffs on manufacturing is vitally important, as some may view the negative consequences of tariff increases documented in existing research—including higher prices, lower consumption, and reduced business investment—as an acceptable cost for boosting manufacturing activity in the United States.
…On the one hand, U.S. import tariffs may protect some U.S.-based manufacturers from import competition in the domestic market, allowing them to gain market share at the expense of foreign competitors. On the other hand, U.S. tariffs have also been imposed on intermediate inputs, and the associated increase in costs may hurt U.S. firms’ competitiveness in producing for both the export and domestic markets. Moreover, U.S. trade partners have imposed retaliatory tariffs on U.S. exports of certain goods, which could again put U.S. firms at a disadvantage in those markets, relative to their foreign competitors. Disentangling the effects of these three channels and determining which effect dominates is an empirical question of critical importance.
…Our results suggest that the traditional use of trade policy as a tool for the protection and promotion of domestic manufacturing is complicated by the presence of globally interconnnected supply chains and the retaliatory actions of trade partners. Indeed, we find the impact from the traditional import protection channel is completely offset in the short-run by reduced competitiveness from retaliation and especially by higher costs in downstream industries…[the] net effect is a relative reduction in manufacturing employment.
Most famously, Whirlpool predicted that tariffs on washing machines would be great for Whirlpool profits, but their pleasure turned to dismay when they realized that steel and aluminum tariffs would raise their input prices.
Hat tip: The excellent Kevin Lewis.
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Current Affairs, Economics, Political Science
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