The costs of trade policy

Posted by: Paul Donovan

17 Jan 2020
  • The US-China trade deal still keeps a lot of trade taxes. How have trade taxes hurt the world economy? US trade taxes created four costs.
  • Nearly all the US trade taxes are paid by US companies. This squeezes profits. The tax has not normally been passed on to consumers. (Washing machines are an exception – consumer prices rose to cover the tax).
  • Supply chains have been rerouted. About half the taxed Chinese goods lost US market share. This hurts Chinese exporters. It is also a cost to US importers (who may pay more for their second choice supplier). However, the cost to US importers is lower than paying the trade tax.
  • Some US firms may relocate production. US production using Chinese parts stops. Firms import Chinese parts into (say) Canada. They export the finished product from Canada to the US. This is negative for US employment. But it does not seem to have been very common.
  • The largest cost is the uncertainty trade policy caused. After twenty five years of investing in global supply chains, companies' trust in trade has been damaged. Slower investment was the main reason for slower US and global growth. The US-China trade deal is unlikely to change trade uncertainty.

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