The Dangerous Economist: Tariffs are regressive: they fall more heavily on lower-income families who tend to spend more of their income on cheap imported goods

Saturday, June 15, 2024

Tariffs are regressive: they fall more heavily on lower-income families who tend to spend more of their income on cheap imported goods

See Tariffs Are More Than Just Taxes. They Are a Tool of Geopolitics: Duties on Chinese imports may hurt low-income consumers, but something bigger is at stake: U.S. economic security by Greg Ip of The WSJ. Excerpts:

"Two new studies show tariffs are regressive, meaning they fall more heavily on lower-income families who tend to spend more of their income on cheap imported goods."
"In his definitive work “Clashing Over Commerce: A History of U.S. Trade Policy,” Dartmouth College economist Douglas Irwin shows that tariff policy has gone through three distinct phases since the 1700s.
From independence until the Civil War, Irwin writes, the purpose of tariffs was mainly revenue: They accounted for 90% of federal receipts. From the Civil War until the Great Depression, the purpose was restriction: protecting northern manufacturers, then represented by the newly dominant Republican party, from imports.
A third era began with the passage of the Reciprocal Trade Agreements Act in 1934 empowering the president to negotiate lower duties if other countries did the same. Reciprocity remained the dominant paradigm after World War II as presidents of both parties sought to knock down other countries’ trade barriers through a mixture of carrots (trade deals) and sticks (targeted duties and quotas)."
"The tariffs he imposed on China and to which President Biden just added are a different animal altogether. They are partly about restriction and reciprocity—protecting nascent industries and prodding China to change its ways. But the more fundamental goal is realignment: diversifying U.S. trade away from China. Its dominance in numerous manufactured goods and processed minerals, officials fear, gives China too much influence over the U.S. and its allies’ economies and, ultimately, security. That fear has grown with the threat of a new “China shock” of cheap manufactured exports."
"Who pays tariffs depends on myriad factors. While several studies found U.S. importers did pay more because of tariffs, those costs weren’t necessarily passed on to consumers. Still, some researchers found the surge of imports from China following its entry into the World Trade Organization in 2001, while displacing millions of American workers, benefited most consumers through lower prices. Logically, tariffs would hurt those same consumers.
Economists Amit Khandelwal of Yale University and Pablo Fajgelbaum of the University of California, Los Angeles illustrate this neatly by studying the increase in the “de minimis” exemption, below which small packages may enter the U.S. duty-free, to $800 from $200 in 2016.
The authors found that 74% of direct shipments received in the poorest ZIP Code were de minimis, compared with 52% for the richest."
"At present, tariffs represent 2% of the value of imports. That would skyrocket to almost 17%, the highest since the passage of the Smoot-Hawley Tariff in 1930, if Trump is re-elected and carries out his threat to raise tariffs to 60% or more on China and 10% on the rest of the world"
"this would shrink the purchasing power of the 20% poorest households by 4.2%, but the top 1% by just 0.9%."