A new study by the New York Federal Reserve Bank suggests Americans are paying for the tariffs on Chinese imports, instead of the Chinese. The announcement isn’t surprising for any free trade advocates who lobbied against the White House’s plan to raise tariffs, however, it’s quite striking at how poorly tariffs are working.
The NY Fed’s study makes two important distinctions on the failure of the tariffs: import prices aren’t dramatically falling and Americans are paying for any cost increases. Both are intrinsically linked together from an economic sense.
The general theory on tariffs is they protect homemade goods from foreign competition by keeping the latter higher or at least forcing the competition to make some changes to off-set price increases. That’s not happening in this case.
The NY Fed reported a very slight two-percent drop in prices since the latest round of tariffs were enacted last year. These prices do not factor in the tariff costs which are added after the fact. However, prices were already on their way down due to general market conditions as other countries all saw product prices drop a bit. Let’s not forget U.S. manufacturing statistics are also down for the year and the drop started long before the multi-week United Auto Workers strike of September and October. The study noted the lower competition could be why prices stayed relatively stable. Why lower prices when your competitors are few and far between?
This ties into part two of the NY Fed’s analysis about Americans paying for the tariffs, instead of the foreign companies. Chinese firms are not worried about losing market share, so they’re willing to pass whatever price increase hits their bottom line to buyers aka Americans. It’s Economics 101. Make it more expensive to produce a product and companies will raise prices on buyers to not lose any money. This is extremely true if no lower-cost alternatives are out there or are still emerging in the marketplace.
“China’s market share has already fallen by roughly 2 percentage points for machinery and electrical equipment and by close to 6 percentage points for electronics,” New York Fed researchers wrote after studying U.S. import data. “A broader look at the trade data shows that China’s lost market share has gone largely to Europe and Japan for machinery and to Malaysia, South Korea, Taiwan, and Vietnam for electronics and electrical equipment.”
So much for helping American businesses.
Tariff supporters will more than likely point towards China’s penchant for currency manipulation as a reason for their companies not lowering prices or being willing to pass costs off to consumers. The NY Fed says currently manipulation may not be why China isn’t worried.
“[T]he facts we’ve reviewed show that Chinese firms have not used the change in exchange rates to regain some of the competiveness lost from tariffs by lowering their prices in dollar terms,” the NY Fed study of China’s currency explained. “Instead, they’ve accepted the loss in competitiveness in the U.S. market and have used the weaker currency to pad profits on each unit of sales.”
So why bother with the tariffs at all, if they’re not working beyond causing economic pain in China and the United States? Cross border investment is already down and likely to fall further. It’s like America is willing to chop off one of its arms to make sure China’s economy falls into the abyss. Sure, the American economy might bleed out but at least it will take longer than the Chinese one. It’s still a dangerous strategy to employ especially when considering how economic pains in one country cause issues in others.
Why not encourage investment in America by lowering tariffs and reducing other regulatory barriers for Americans looking to start a company? This encourages China and other foreign countries to lower their own barriers and tariffs, plus invest money in the United States. That money would go towards paying American workers in factories in America. It would also let American buyers keep more money in their own pockets because they’d be paying fewer taxes on goods. Everyone benefits. Instead, the government is looking to hurt everyone by lining its own pockets through taxes.