American companies and consumers are paying almost the full cost of U.S. tariffs, and the impact of those duties on import volume magnifies over time, according to a paper circulated Monday by the National Bureau of Economic Research.
Traditional trade theory would suggest tariffs levied by the U.S. should cause foreign firms to lower prices and thereby force them to shoulder the cost of the duties. However, the study by Federal Reserve Bank of New York researcher Mary Amiti and professors Stephen Redding of Princeton and David Weinstein of Columbia shows the levies haven’t had a major impact on foreign export prices, suggesting American firms and consumers bear almost all the burden in most sectors as companies work to reorganize supply chains.
“Among goods that continue to be imported, a 10% tariff is associated with about a 10% drop in imports for the first three months, but this elasticity doubles in magnitude in subsequent months,” the authors wrote. That suggests “the 2018 tariffs - many of which were applied in October - are only now having their full impact on U.S. import volumes.”
A separate working paper circulated by NBER Monday showed the 2018-19 tariffs also damped U.S. exports.
While Americans bear the cost of tariffs in most sectors, the same doesn’t apply in the politically important steel industry, the study by Amiti, Redding and Weinstein showed.
President Donald Trump fulfilled a campaign promise when his administration put 25% duties on imported steel in March 2018. The decision, meant to protect the industry from dumping practices by countries like China, was widely praised by producers, several of which announced plans to boost output.
The paper finds the European Union and nations including South Korea and Japan are shouldering almost half the cost of U.S. steel tariffs. That’s good news for U.S. companies demanding the metal, “but bad news for workers hoping that steel tariffs will bring back jobs,” the paper said. It also may help explain why American steel production only increased by 2% per year between the third quarter of 2017 and the third quarter of 2019 despite the 25% steel tariffs, according to the authors.
The paper follows U.S. Steel Corp.’s December announcement that it would close its giant plant outside of Detroit and lay off as many as 1,545 workers. Following this, U.S. Commerce Secretary Wilbur Ross said the closure didn’t mean the import tariffs aren’t working.
The paper’s authors seem to disagree. “These results suggest that the steel tariffs have a much smaller capacity to protect steel workers than other tariffs,” they said.
The U.S. trade gap narrowed in November to the smallest in three years as exports advanced amid a thaw in the trade war with China, while imports fell to the lowest since 2017.
The overall U.S. deficit in goods and services shrank to $43.1 billion in November from $46.9 billion the prior month, according to data released Tuesday by the Commerce Department. The median estimate of economists surveyed by Bloomberg called for a shortfall of $43.6 billion.
The report indicates trade is on track to contribute to fourth-quarter economic growth after having weighed on gross domestic product for the previous two periods, though the shift reflects more of a drop in imports than a gain in exports.
The figures also suggest the gap may shrink on an annual basis for the first time since 2013. For the first 11 months of 2019, the gap was $563 billion, compared with $566.9 billion in 2018; for merchandise, the deficit narrowed to $791.2 billion from $806.4 billion.
The U.S. and China announced a phase-one accord in mid-December following agreement in October on the broad contours, at least temporarily calming fears of an escalating trade war. The deal will involve reduced tariffs in exchange for more Chinese purchases of American farm goods such as soybeans and pork as well as commitments on intellectual property, forced technology transfer and currency markets.
The merchandise trade deficit with China shrank to a seasonally adjusted $25.6 billion, the smallest since 2013, according to data compiled by Bloomberg. Exports to the Asian nation rose by $1.4 billion, the most since February, while imports declined for a sixth straight month, reflecting the toll of more than a year of tariffs.
Deal Signing
President Donald Trump has said he’ll sign the trade deal in Washington Jan. 15. A Chinese delegation, led by its top trade negotiator, Vice Premier Liu He, will travel to the U.S. capital to sign it, according to people familiar with the matter, Bloomberg reported this week.
The U.S. typically runs a services surplus and merchandise deficit, a shortfall that Trump has assailed as unfair.
Even as a shrinking deficit provides a possible talking point for Trump, overall U.S. trade with China has fallen sharply in 2019, dropping the Asian nation to third place among trading partners, behind Mexico and Canada.
In the first 11 months of last year, merchandise imports from China were down 15% and exports to the country dropped 11.4%. The U.S. goods deficit with China narrowed to a seasonally adjusted $319.8 billion from the same 11 months of 2018, the report showed.
Overall exports of goods and services in November rose 0.7% to $208.6 billion, including gains in consumer goods, capital goods and soybeans. Imports fell 1% to $251.7 billion, with declines in civilian aircraft, consumer goods and petroleum products.
In nominal terms, the petroleum surplus edged up to a record $832 million, further boosting America’s new status as a net exporter. Price-adjusted imports of petroleum were $27.2 billion, the lowest in data back to 1994.
By Scott Lanman and Ana Monteiro, with assistance from Kristy Scheuble
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January 07, 2020 at 05:41PM
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