S2 Ep16: The 2018 trade war

Episode Summary

Executive Summary: The episode examines the 2018 U.S.-China trade war through new research by Amiti, Redding, and Weinstein. It finds tariffs were fully passed through to U.S. prices, raised producer costs, disrupted supply chains, and imposed sizable welfare losses, even as tariff revenue flowed to government. The discussion argues trade wars are costly, only partly offset by bargaining gains, and better addressed multilaterally.

Main Topics: Scale of the 2018 trade war (Priority: 5/5): The tariffs marked a major rollback of trade liberalization, affecting a large share of U.S. imports and exports, though still smaller than the 1930s. Why tariffs happen (Priority: 5/5): The conversation highlights political economy and terms-of-trade motives: organized interest groups benefit, and large countries may sometimes shift import prices in their favor. Who pays and who gains (Priority: 5/5): Tariffs generate government revenue, but this is largely a transfer from consumers and importers; additional losses arise from higher prices and deadweight costs. Empirical method and causal identification (Priority: 4/5): The researchers use a differences-in-differences design comparing tariff-targeted sectors with untargeted ones to isolate tariff effects from business-cycle noise. Price effects and producer pass-through (Priority: 5/5): The study finds full pass-through of tariffs to import prices and higher U.S. manufacturing prices due to costlier inputs and reduced competition. Global supply-chain reorganization (Priority: 4/5): Firms responded by rerouting sourcing away from tariffed countries, causing large import declines in targeted sectors and costly restructuring of value chains. Policy lesson: multilateralism over unilateralism (Priority: 5/5): The guest argues that issues like IP theft are shared by many countries and should be tackled with allies rather than through unilateral tariffs.

Key Arguments: Tariffs in 2018 were substantial, reversing roughly 25-30 years of trade liberalization and affecting sizable shares of trade. Political incentives make tariffs attractive to concentrated beneficiaries even when they reduce average welfare. For a large country like the U.S., tariffs can sometimes improve terms of trade, so the textbook case against tariffs is more nuanced than introductory economics suggests. Government tariff revenue is not a net national gain because it is offset by higher costs borne by consumers and firms. The study’s identification strategy compares tariffed sectors to similar non-tariffed sectors to isolate the effect of tariffs from broader macroeconomic conditions. Import prices rose one-for-one with tariffs, showing essentially complete pass-through to U.S. buyers. U.S. manufacturing prices increased because firms paid more for imported inputs and because tariff protection allowed domestic firms to raise markups. Supply chains adjusted sharply, with firms rerouting imports to avoid tariffs, creating additional adjustment costs not fully captured in simple price measures. Stock market reactions in both the U.S. and China suggest investors expected substantial economic losses from the trade war. A better approach to China-related concerns, especially intellectual property, would be coordinated multilateral pressure with Europe and other partners rather than unilateral tariffs.

Data Points: U.S. imports affected by tariffs: About 12% - Share of U.S. imports hit by tariffs during the trade war U.S. exports hit by retaliation: About 16% - Share of U.S. exports affected by other countries' retaliatory tariffs Tariff revenue: About $3 billion per month - Estimated tariff revenue flowing to the U.S. Treasury Extra cost to consumers/import purchasers: About $4.4 billion per month - Estimated monthly increase in spending on imports due to tariffs Net deadweight loss: About $1.4 billion per month - Portion of consumer/importer burden not offset by government revenue Import price pass-through: 100% - Tariffs on Chinese space heaters fully raised import prices Average U.S. manufacturing price increase: About 1.1 percentage points - Rise in producer prices due to higher input costs and less competition Share of producer price increase due to less competition: About one-fifth - Portion of the 1.1 percentage point increase attributed to increased markups Import decline in targeted sectors: 60% drop - Observed reduction in imports in sectors facing a 10% tariff Trade redirected to avoid tariffs: About $165 billion annually - Estimated volume of trade reorganized or redirected away from tariffed sources U.S. market reaction to steel tariff announcement: -2.6% on the day; nearly -5% over three days - Stock market response to March 23 tariff announcement U.S. equity market capitalization: Around $30 trillion - Used to illustrate the scale of anticipated losses from market reaction Illustrative offset for IP gains: Three years - If royalties from China rose 25%, it would take about three years to offset 2018 welfare losses

Pivotal Quotes: "That's not free trade. That's stupid trade." — Tim Phillips: Opening framing of the trade war and its policy critique "The tariffs were being passed on completely to consumers." — David Weinstein: Summary of the paper's core finding on import price pass-through "At least in the first year, trade wars are bad and hard to win." — David Weinstein: Bottom-line takeaway from the 2018 evidence

Implications: Listeners should expect tariffs to raise prices, disrupt supply chains, and create large welfare losses. The episode suggests trade conflicts are costly in the short run and are better managed through coordinated international pressure than unilateral escalation.