Americans have felt the impact of the U.S.-China trade war on many fronts in the past few years. As the presidential election approaches, voters will have an opportunity to consider whether current trade policies are serving them and the country well—and to cast their votes accordingly.
Our current protectionist policies date back to 2018, a year after former President Trump was inaugurated. One common belief in the administration was that the cost of the tariffs would be borne by China and not the U.S.
Since then, we’ve had time to study how these policies affected our economy—and the impacts weren’t what the tariff proponents anticipated. According to various studies, the 10-25 percent tariffs on $362 billion of goods imported from China have been passed on to U.S. consumers and firms purchasing Chinese intermediate inputs. These tariffs have had the greatest effect on lower-income households, who spend a disproportionate share of their income on inexpensive Chinese imports such as toys and electronics, compared to affluent households, who spend more on services.
There has been an even greater impact on U.S. corporations. Firms importing from China have experienced slower growth, lower profits, reduced productivity, and employment.
Stock markets anticipated these negative effects. According to research I've coauthored with colleagues, the stock market fell on average by a little more than one percent per day on the 11 days U.S. and Chinese tariffs were announced, resulting in a 12 percent cumulative decline. These tariffs triggered a $4.1 trillion decline in the U.S. market, spread across the announcement days.
The tariffs had much broader effects than most people initially anticipated. One major reason is that U.S. importers aren’t the only firms affected by the tariff war. Over 40 percent of listed firms in the U.S. sell in the Chinese market by either exporting or, more often, through their foreign subsidiaries. Overall, we find that over half of all U.S. listed firms either purchase products or sell in China. This enables China to retaliate not just through higher tariffs but also through non-tariff barriers that make it more difficult for U.S. firms to operate in China.
All told, when you consider all the ways that the trade war has hurt U.S. firms and consumers, we estimate the trade wars have reduced the welfare of U.S. citizens by about 3 percent. That’s because, beyond the direct impacts on consumers and companies, the trade war likely contributed to increased economic uncertainty, a breakdown in the world trading system, and lower productivity growth. So, where do the presidential candidates stand on these issues?
Trump is likely to double down on these policies. He has proposed raising tariffs on China to 60 percent and an across-the-board tariff of 10 percent on imports from all of our trading partners. This policy would likely have two important impacts. First, since big U.S. exporters are typically big U.S. importers, higher tariffs will render many of our most successful firms uncompetitive in international markets because U.S. firms will have to pay more for imported intermediates. Thus, while the tariffs may create gains for these firms in the domestic market, the gains will be partially or fully offset by losses abroad. Since exporters tend to be the most productive U.S. firms, we will likely see fewer high-tech jobs and more jobs in low-tech manufacturing industries like washing machines (one of the first sectors Trump targeted).
Second, it is likely that other countries will retaliate against the U.S. if we adopt a protectionist policy by raising their tariffs, as they did in 2018. This retaliation will further diminish U.S. exports, lower wages, and cost jobs. A full-blown trade war would likely cause a “Fortress Europe” scenario, where allies raise barriers against U.S. products. That could harm U.S. exporters, reducing corporate profitability and causing layoffs.
Democrats aren’t necessarily against tariffs. President Biden maintained the Trump tariffs against China, and Vice-President Harris is unlikely to reduce them. While some tariffs may have a national security rationale, it is difficult to understand how tariffs on Chinese-made washers and toys make us safer. A Harris administration would likely focus any new protection on industries crucial for national security or potential supply-chain choke points. In addition, she supports using tariffs to penalize countries with lax environmental or labor regulations. While strong economic arguments exist for the former, there is little evidence that tariffs effectively raise labor standards.
What is clear is that the “Washington Consensus” that used to place trade liberalization at the center of economic policymaking has collapsed. In this election, American voters will have a strong say in whether it is replaced by an isolationist American regime or one that focuses protection on countries that are national security threats or pursue lax environmental and labor policies.
