Stockholm (Ekonamik) – Following last week’s escalation of tariff threats from President Trump to the EU and the fact that it featured prominently into the ECB’s considerations, we wanted to take a look at the effects of the USA’s combative approach to international trade.
To understand what has been going on, I turned to the recent research of Fajgelbaum, Goldberg, Kennedy and Khandelwal (2019)* and of Amiti, Redding and Weinstein (2019)**.
The figure below overlaps the path of average trade tariffs in the USA (blue lines, on the left vertical axis) with the evolution of the US’s trade balance for goods and services (red line, on the right vertical axis) and for goods alone (yellow line, on the right vertical axis), on a background of the NBER identified US recessions (grey shaded area).
Source: WB, ARW 2019**, FRED
Ostensibly, the higher import tariffs were not conducive to an improvement of the USA’s total trade balance – rather the opposite. While the Obama years saw consistent trade deficits of around US$ 40 billion per month, Trump’s tariffs seem to coincide with an increase in the trade deficit to US$ 60 billion by the December 2019. This is their highest level since the 2007-09 great recession. The situation is similar, if not worse for the trade balance of goods alone.
What seems to have happened is not so much a decrease in the total value of imports, as much as a decrease in exports due to the retaliatory tariffs imposed on US exports by its trading partners. For example, there is evidence that the Chinese have been able to easily replace American soy with Brazilian soy, although not without threatening the environment. At the same time, the analysis conducted by Amiti, Redding and Weinstein (2019)** suggests US producers have passed the added production costs imposed by the trade tariffs on to consumers. So, on average American’s purchasing power has decreased due to the tariffs.
Ekonamik is not opposed to trade deficits, in principle, as long as they are sustainable. The problem with the figure above is not that there is a trade deficit or that it has increased. Given the sustained appeal of the USA economy and its currency for foreign investors, the trade deficit is virtually inevitable. The problem is the actual tariff increase, which appears to have needlessly deteriorated the trade balance of the USA.
Last but not least, as Fajgelbaum, Goldberg, Kennedy and Khandelwal (2019)’s research* shows, the opportunistic targetting of the tariffs to protect President Trump’s constituencies also failed. As the authors put it, their analysis provides “suggestive evidence that the US tariffs may have aimed to protect electorally competitive counties with a 40-60% GOP vote share. Foreign countries, on the other hand, targeted rural, agriculture counties that voted strongly in favour of the GOP in 2016.”
The US’s trade war against the world has been going on for less than two years and already it appears it has done enough damage. Perhaps it is time to put the whole thing to sleep.
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Bibliographic references:
* Fajgelbaum, P, P Goldberg, P Kennedy, and A Khandelwal (2019), “The Return to Protectionism,” NBER Working Paper No. 25638.
** Amiti, Mary, Stephen J. Redding, and David E Weinstein “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” CEPR Discussion Paper 13564, May 2, 2019 (forthcoming)
