For most of the last four decades, the United States has been at the forefront of free trade.
“Tariffs haven’t been an important policy for some time,” says Amit Khandelwal, the Jerome A. Chazen Professor of Global Business.
That all changed in February 2018 when the Trump Administration slapped 16.6 percent tariffs, up from 2.6 percent, on more than 12,000 imported goods from Canada, Mexico, the European Union, and, crucially, China.
Those countries, China most notably, then retaliated, increasing tariffs on more than 8,000 US exports from 7.3 percent to 20.4 percent and touching off a trade war that has economic as well as electoral implications as all eyes turn to the 2020 presidential contest.
The move, intended to be largely punitive, was reminiscent of the blend of politics and protectionism of the Depression-era Smoot-Hawley Tariff Act or the 1971 “Nixon shock,” according to Khandelwal.
It’s a nexus he explores in “The Return to Protectionism,” a paper slated to be published in 2020 in the Quarterly Journal of Economics. Co-authored with Pablo Fajgelbaum, associate professor of economics at UCLA, Pinelopi K. Goldberg, the Elihu Professor of Economics at Yale University and Chief Economist at the World Bank, and Patrick Kennedy, a PhD student at the University of California at Berkeley, the study explains the Trump administration’s geographical and political motivations behind imposing the tariffs.
The research demonstrates that industries based in swing counties, where only between 40 and 60 percent of the electorate voted Republican in 2016, have received the most amount of tariff protection on their goods, such as steel. Yet the agricultural Midwest, which voted overwhelming for President Trump, has borne the brunt of the overseas retaliatory measures and have paid more to export goods.
“We wanted to understand the pattern of protection and retaliations,” Khandelwal says.
In their search for a rationale for the trade war, Khandelwal and his colleagues did not originally intend to add the political element to their research, but were swayed to do so after considering three different reasons why a government would impose tariffs.
The first is if a nation is an important buyer of an imported good, a tariff might force the importer to lower the before tariff price. “In that case, there would be a benefit to the economy because imported tariff-inclusive prices don’t change and you collect tariff revenue,” Khandelwal says. Second, lobbying efforts on the part of certain industries could result in protection. “People often say that protection is for sale,” Khandelwal says, “but in this episode, we do not find any evidence that industries were lobbying for tariff protection."
Khandelwal notes the researchers were then drawn to the third reason: tariffs could be used to influence voters.
“One thing that is curious about US trade policy is that companies can lobby for tariff protection, but workers cannot,” Khandelwal says. “The only way workers can really lobby for protection is at the ballot box.”
And come November 2020, it is the votes from workers in the tariff-protected industrial counties in key swing states such as Ohio and Pennsylvania that the Trump campaign is hoping to capture.
In the country at large, Khandelwal and his colleagues found that the administration’s trade policy has resulted in US consumers paying the cost of the tariffs as importers have not lowered their pre-duty costs. This loss amounts to $51 billion.
The tariffs benefit for US producers who compete with importers. Adding these gains, along with government revenue, the researchers estimate that the US economy overall lost $7.2 billion due to 2018 tariffs. These losses are a lower bound since the trade war has escalated in 2019. Additionally, wages of workers in agricultural counties affected by retaliatory tariffs have dipped.
Khandelwal says the road to current US policy on tariffs started when China joined the World Trade Organization in 2001, which ignited an explosion in their exports to America.
“Basically, one out of every five dollars Americans spend on imported goods is on a Chinese product,” Khandelwal says. “There’s been a series of analysis that have shown that those imports have contributed to manufacturing losses in particular parts of the country.”
The hope that tariffs will result in the return of manufacturing is, Khandelwal explains, one of the stated objectives in the trade war, though that outcome is muddied by the fact that it’s automation that is a primary reason for factory job losses.
Another, and perhaps more lasting, reason for imposing tariffs is the administration’s belief they can be used as leverage to negotiate changes in Chinese behavior and attitudes toward intellectual property.
“The hope would be that China enforces laws that are on their books that respect trademarks and copyrights,” Khandelwal says. “It’s so there won’t be any outright theft of blueprints.”
The battle over intellectual property indicates to Khandelwal that such protectionist policies could be the norm in the US for a protracted period, no matter which party controls the White House in 2020 and beyond.
“Tariffs are going to be in place for a long time,” Khandelwal says. “I think that it would be politically very difficult for whoever the next president is, if it’s not Trump, to lower the tariffs.”
About the researcher
Professor Khandelwal teaches an elective course on International Business. His research interests examine issues in international and development economics, including the strategic response of...Read more.