The study found that the United States’ 25 percent increase in tariffs depresses Chinese producer prices by 20.5 percent and raises U.S. consumer prices by only 4.5 percent.
The Trump administration has imposed 25 percent tariffs across $50 billion worth of Chinese goods in 2017 import value and is set to raise tariffs from across another $200 billion worth of Chinese goods from 10 percent to 25 percent on Jan. 1.
“The U.S. government has strategically levied import duties on goods with high import elasticities, which transfers a great share of the tariff burden on to Chinese exporters,” stated study authors Benedikt Zoller-Rydzek and Gabriel Felbermayr. “Chinese firms pay approximately 75 percent of the tariff burden and the tariffs decrease Chinese exports of affected goods to the United States by around 37 percent.”
This implies that the United States’ trade deficit with China drops by 17 percent, and the additional tariffs generate U.S. government revenues of $22.5 billion, which could be redistributed in the U.S., the authors wrote.
The study examined 702 four-digit product categories from the Harmonized System.
Consumer goods are the most heavily impacted by the tariffs, with prices expected to rise 6.5 points on average, with prices of intermediate inputs expected to increase by 5.2 percentage points.
“Low-income U.S. households in particular will be affected by this increase, as they spend a considerable share of their income on (cheap) Chinese imports,” Zoller-Rydzek and Felbermayr wrote. “This will lead to a stronger decline in real income for U.S. low-income households.”
While U.S. tariffs will increase prices of affected Chinese products in the U.S., decrease the profit margin of Chinese exporters and could shut Chinese firms out of the market, it’s unclear whether U.S. firms, especially multinationals, will have enough time to fill any emerging shortages in their supply chains before the next scheduled tariff raise, the study says.
Multinationals’ high initial investments in Chinese production sites makes it “very costly” to adjust supply chains and profits may therefore drop, according to the study.
The study notes that the tariffs on China affect about half of the United States’ import volume from China and about 12 percent of all U.S. imports.
“Through its strategic choice of Chinese products, the U.S. government was not only able to minimize the negative effects on U.S. consumers and firms, but also to create substantial net welfare gains in the U.S. The U.S. government implemented an optimal tariff strategy,” the study’s conclusion states. “As the trade conflict escalates, however, the U.S. administration may not be able to restrict its selection to products with high import elasticities; and U.S. welfare might decrease as more of the tariff incidence falls on U.S. consumers.”