77: Happy Tariffversary

Episode Summary

Executive Summary: This episode examines who actually pays for Trump’s steel and aluminium tariffs using two new academic studies. Both papers find that, in the short run, U.S. consumers and importers bore most costs through higher prices, while domestic steel producers gained. The effects were unevenly distributed across U.S. regions and had important political and supply-chain consequences.

Main Topics: Tariff incidence: who pays? (Priority: 5/5): The episode centers on whether foreign exporters absorbed Trump’s tariffs through lower prices or whether U.S. importers and consumers paid through higher prices. Both studies conclude pass-through was largely borne domestically. Short-run effects on prices, production, and imports (Priority: 5/5): Tariffs reduced import volumes, raised steel and aluminium prices, and increased domestic production in protected sectors, but also raised costs for downstream U.S. firms and consumers. Supply-chain and product-variety disruptions (Priority: 4/5): The tariffs caused large shifts in sourcing, with imports falling in targeted sectors and product variety declining, suggesting firms scrambled to find substitutes or lower-quality inputs. Regional winners and losers (Priority: 5/5): One paper maps tariff exposure across counties, finding gains concentrated in Rust Belt manufacturing areas and losses concentrated in agricultural and Midwestern plains regions hit by retaliation. Political targeting and voter geography (Priority: 4/5): The research suggests protection was strongest in politically competitive counties, while foreign retaliation disproportionately hit heavily Republican, agriculture-heavy counties. Aggregate vs distributional effects (Priority: 4/5): Although the overall national welfare loss was relatively modest in aggregate terms, the distributional impacts across workers, firms, and regions were substantial.

Key Arguments: Tariff incidence was borne mainly by U.S. consumers/importers, not foreign exporters, because exporters did not meaningfully cut prices after the tariffs were imposed. The steel and aluminium tariffs behaved similarly to other 2018 tariff waves; pass-through rates were comparable across tariff rounds. Trade restrictions reduced targeted U.S. imports by a very large amount and disrupted supply chains, forcing firms to search for alternative suppliers. Higher input costs and reduced foreign competition pushed up U.S. producer prices, including through higher markups by domestic firms. Some domestic steel workers and producers benefited, but downstream users of steel and aluminium faced higher costs and potentially lower-quality inputs. The geographic effects were uneven: Rust Belt counties tended to gain from protection, while Midwestern plains counties were hurt by retaliation and higher prices. County-level protection was greatest in politically competitive counties, suggesting tariffs may have had electoral targeting motives. Foreign retaliation disproportionately hit heavily Republican, agriculture-oriented counties, amplifying regional political effects. Even when the aggregate loss is modest, the redistribution across sectors and regions is large and economically meaningful. Both studies emphasize their findings are short-run estimates, so the incidence could evolve over time.

Data Points: Steel import coverage: About one-third of U.S. steel imports - Initial March 23, 2018 tariffs were imposed on this share of imports. Aluminium import coverage: About 45% of U.S. aluminium imports - Initial March 23, 2018 tariffs covered this share. Steel import volume: Down - Most recently available monthly trade data showed lower steel import volumes after tariffs. Aluminium import volume: Down - Monthly trade data showed lower aluminium imports after tariffs. Steel and aluminium prices: Up - Prices of both products rose after tariffs, consistent with reduced supply. U.S. steel production and primary aluminium production: Up - Domestic production increased following tariff protection. Import decline in targeted sectors: $136 billion - US imports in targeted sectors fell relative to untargeted sectors in Team David's study. Share of U.S. merchandise imports affected: About 5% - The $136 billion decline amounted to roughly 5% of U.S. merchandise imports. U.S. producer price increase: About 1.1% - David Weinstein described this as the tariff effect on U.S. producer prices. Monthly losses by end of year: About $1.4 billion per month - Team David estimated losses rising to this level in the last months of the year with most tariffs in place. Potential manufacturing jobs restored: Around 35,000 jobs - Best-case scenario estimate of jobs that could be restored in steel and aluminium. Cost per job saved: About $200,000 per job - Team David’s estimate of the tariff cost per job saved. Typical steel worker wage: Just over $50,000 per year - Used to compare tariff cost per job saved with direct wage support. Alternative wage-support cost per job: About $140,000 per job - Estimated savings if workers were paid directly instead of protected via tariffs. Overall trade war loss: $7.8 billion - Team Amit’s aggregate welfare estimate. Overall trade war loss as share of GDP: 0.04% of GDP - Amit Khandelwal characterized the aggregate loss as small relative to GDP. Politically competitive counties: 40% to 60% Republican vote share - Defined as counties where import protection was highest.

Pivotal Quotes: "American consumers or the firms that import the steel are bearing the full cost of the tariffs." — David Weinstein: Explaining the main finding of his team’s study on tariff incidence. "The tariffs may be used as a way to protect particular sets of voters." — Amit Khandelwal: Describing the political economy hypothesis behind county-level tariff targeting. "we find that the counties that are kind of most protected by the tariffs ... tend to be concentrated in what's known as the Rust Belt" — Amit Khandelwal: Summarizing where domestic protection benefits were concentrated geographically.

Implications: The episode suggests tariffs are costly, regressive, and politically targeted in ways that reshape regional winners and losers. For firms and consumers, higher input costs and supply-chain disruption remain the key risk; for policymakers, the results challenge claims that foreigners bear the burden.