How Have China's Retaliatory Tariffs Affected US Consumption?
Between 2017 and early 2019, counties highly exposed to retaliatory tariffs saw consumption growth drop by at least 3.8 percentage points relative to low-impact counties.
Agriculturally dependent counties in Iowa, which once sold soybeans and pork to China, have experienced greater impact from the US-China trade war than service dependent counties near New York City. How did retaliatory tariffs affect local economic activity?
In The Consumption Response to Trade Shocks: Evidence from the US-China Trade War (NBER Working Paper 26353), Michael E. Waugh finds that changes in trade policy affected consumer spending on durable goods, notably automobiles. He concludes that Chinese retaliation against US tariffs led to concentrated welfare losses.
The study finds that counties highly exposed to trade with China experienced a decline in new car sales relative to counties with little export activity that was directed to China. The relative drop in consumption between 2017 and January 2019 was at least 3.8 percent, and could be as high as 5.5 percent. New car sales are a proxy for overall consumption; they have the advantages of being high frequency — they're reported monthly — and being available by county.
The impact of the trade war can be seen starting in July 2018, when China imposed the first of three phases of retaliatory tariffs on US goods. Before that time, auto sales were growing a little over 1 percent a year in both high-tariff and low-tariff counties. After July 2018, sales growth fell in counties of both types, but they fell 2.7 percent in high-tariff counties and 0.5 percent in low-tariff ones. Formal statistical analysis confirms these findings and suggests that a 1 percentage point increase in exposure to Chinese retaliatory tariffs results in a 1 percentage point decrease in the growth of sales of new autos.
A drop in car sales can have a significant impact on consumption. On average, the top quartile of trade war-vulnerable counties saw 82 fewer cars sold per year as a result of retaliatory tariffs. If the average new car in 2017 sold for $36,000, then the aggregate loss for those counties equaled about $2.3 billion. The loss when "moderately affected" counties are included is much larger — $9.3 billion — because there are many more such counties than heavily affected ones.
The estimates probably represent a lower bound of impact, the researcher writes, because a decline in the number of autos sold doesn't capture other belt-tightening behaviors, such as a shift to purchasing less expensive vehicles.
The study also considers the effects of retaliatory tariffs on employment. A county with high exposure to exports to China saw, on average, a 1 percentage point decline in overall employment relative to a low-tariff county. For goods-producing jobs, the fall is greater: about 1.5 percentage points. These results support the finding of consumption decline, since employment loss could be one channel to consumption decline.
— Laurent Belsie