Trade war cost $7.8 billion, new paper finds

a smoke stack billowing steam or smoke

The researchers found that protective tariffs helped American producers, such as Rust Belt steel companies, and hurt others, like soybean farmers. (Creative Commons image by Billy Wilson)

The 2018 trade war cost the American economy $7.8 billion dollars in lost gross domestic product, according to a new paper authored by a team of economists at UC Berkeley, Columbia University, Yale University and UCLA.

The paper, “The Return to Protectionism,” makes that case that President Donald Trump’s trade war with countries like China actually hurt the overall American economy, even as the Trump administration claimed to be protecting jobs, technology and intellectual property.

The tariffs on imported products were passed almost entirely to consumers and businesses, amounting to what Patrick Kennedy, a doctoral student at Berkeley who co-authored the paper, calls “essentially a sales tax paid by U.S. purchasers.”

Kennedy and his co-authors studied monthly data sets of tariff rates released by the U.S. International Trade Commission and tracked, almost in real time, how the changes in those tariffs in 2018 affected the prices of more than 12,000 products from over 200 countries.

“This is the first time in at least a generation that we’ve had a chance to empirically examine what happens to an economy as big as the United States when there is a large-scale trade war,” Kennedy says.

The researchers found that protective tariffs helped American producers, such as Rust Belt steel companies, gain $23 billion in new revenue.

But higher costs to consumers and retaliatory tariffs on export-dependent industries, like Midwestern soybean farmers, amounted to a net economy-wide loss of $7.8 billion.

Kennedy and his co-authors also found that the beneficiaries of tariffs on U.S. imports, like steel workers, are more likely to live in electorally competitive counties where 40 to 60 percent of voters identify as Republican. This suggests a possible political motivation for the trade war, Kennedy says.

a map of the united states with lots of red in the midwest

A map of the counties hardest hit by the 2018 trade war. (Image courtesy Patrick Kennedy)

a map of the united states with lots of red around the rust belt

A map of the counties that benefit the most from the 2018 trade war. (Image courtesy Patrick Kennedy)

However, their analysis found that the costs of the trade war are being borne disproportionately by heavily Republican counties, especially those in the Midwestern plains and Mountain West.

“Retaliations by U.S. trade partners offset the benefits of U.S. tariffs in virtually all counties, but especially in rural, agricultural counties,” Kennedy says. The study estimates that, had trade partners not retaliated against the United States, the aggregate loss to the American economy would be one-third the size of the actual impact.

As the trade war continues in 2018, Kennedy says he and his colleagues will continue to study the unfolding action of tariff changes and policy talks with China.

“For a long time, trade has been a very theoretical field,” he says. “Economics as a field is becoming increasingly empirical and data-driven. This project is very much in line with that movement.”

Contact Will Kane at willkane@berkeley.edu