The Effects on America from the China Trade War

This week I have decided to look at a study that analyzes the effects on American welfare and prices due in 2018 due to the trade war between the US and China. I found an empirical study done by Mary Amiti, Stephen J. Redding,and David Weinstein that was published in March of this year. They go into detail about the effects of these tariffs and what they are seeing happening. Through a few different regression models, they concluded that import protection leads to real income losses. They found  the cumulative deadweight welfare loss to be $7B, additionally, they found a cost of $12.3B to domestic consumers and importers in the form of tariff revenue transferred to the government. They also found that $165B was lost or redirected to avoid tariffs.

As for Prices, they found that the cost of these tariffs have all been passed on directly to the consumer. They also noted a competition effect, this meaning that domestic producers raised prices due to foreign competitors raising prices because of tariffs. After the authors ran a few different regression models and manipulated the numbers, with a few limitations in mind, they found that US prices were 1.1% higher in manufacturing due to these tariffs. They also pointed out a somewhat obvious but important note, that being that the more that is imported by the producer, the higher they find cost to be per product. The explanation they talked about was that with these tariffs, they found that a producer that imports 15% of its variable cost and has to face a 10% tariff, that producer raises its prices by 2.7%.

These effects make sense when thinking about the short term model we have discussed in class. This is because an import will make something cost more at home. This resulting in a home cutting back consumption. The gap between the price paid by foreign and home being the amount collected per unit. After going through the trade triangle discussed in class with parts A-D we can see that this gap is made up of the increase is made up of the increase in producer surplus, government tariff revenue, and net welfare loss. This making it clear that the foreign country lost in this case. This explaining why the consumer price is rising. This model does make it clear that this is hurting foreign harder though. However, this is only looking at one sided tariffs, when looking at a trade war like one that we are currently in, the results may be different and need to be weighed before acting. This shown by this study.