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The Recent Consequences of Trade Wars and Trade Threats

Paper Session

Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PST)

Marriott Marquis, Marina Ballroom E
Hosted By: American Economic Association
  • Chair: Kyle Handley, University of Michigan

The Impact of the 2018 Trade War on United States Prices and Welfare

Mary Amiti
,
Federal Reserve Bank of New York
David Weinstein
,
Columbia University
Stephen J. Redding
,
Princeton University

Abstract

This paper explores the impacts of the Trump administration's trade policy on prices and welfare. Over the course of 2018, the U.S. experienced substantial increases in the prices of intermediates and final goods, dramatic changes to its supply-chain network, reductions in availability of imported varieties, and complete passthrough of the tariffs into domestic prices of imported goods. Overall, using standard economic methods, we find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018. We also see similar patterns for foreign countries who have retaliated against the U.S., which indicates that the trade war also reduced real income for other countries.

The Return to Protectionism

Pablo Fajgelbaum
,
University of California-Los Angeles
Pinelopi Goldberg
,
World Bank Group
Patrick Kennedy
,
University of California-Berkeley
Amit K. Khandelwal
,
Columbia University

Abstract


After decades of supporting free trade, in 2018 the U.S. raised import tariffs and major trade partners retaliated. We analyze the short-run impact of this return to protectionism on the U.S. economy. Import and retaliatory tariffs caused large declines in imports and exports. Prices of imports targeted by tariffs did not fall, implying complete pass-through of tariffs to duty-inclusive prices. The resulting losses to U.S. consumers and firms who buy imports was $51 billion, or 0.27% of GDP. We embed the estimated trade elasticities in a general-equilibrium model of the U.S. economy. After accounting for tariff revenue and gains to domestic producers, the aggregate real income loss was $7.2 billion, or 0.04% of GDP. Import tariffs favored sectors concentrated in politically competitive counties, and the model implies that tradeable-sector workers in heavily Republican counties were the most negatively affected due to the retaliatory tariffs.

The looming threat of tariff hikes: entry into exporting under trade agreement renegotiation

Oliver Exton
,
University of Cambridge
Meredith Crowley
,
University of Cambridge
Lu Han
,
University of Liverpool

Abstract

The renegotiation of a trade agreement introduces uncertainty into the economic environment. In June 2016 the British electorate unexpectedly voted to leave the European Union, introducing a new era in which the UK and EU began to renegotiate the terms of the UK-EU trading relationship. We exploit this natural experiment to estimate the impact of uncertainty associated with trade agreement renegotiation on the export participation decision of firms in the UK. Starting from the Handley and Limao (2017) model of exporting under trade policy uncertainty, we derive testable predictions of firm entry into (exit from) a foreign market under an uncertain `renegotiation regime'. Empirically, we develop measures of the trade policy uncertainty facing firms exporting from the UK to the EU after June 2016. Using the universe of UK export transactions at the firm and product level, and cross-sectional variation in `threat point' tariffs, we estimate that in 2016 over 5300 exporters did not enter into exporting new products to the EU. The looming threatof tariff hikes detered entry modestly in the
first month after the referendum, but the deterent effect grew over time.

Brexit Uncertainty and Trade Disintengration

Alejandro Graziano
,
University of Maryland
Kyle Handley
,
University of Michigan
Nuno Limao
,
University of Maryland

Abstract

We estimate the uncertainty effects of preferential trade disagreements. Increases in the probability of Britain’s exit from the European Union (Brexit) reduce bilateral export values and trade participation. These effects are increasing in trade policy risk across products and asymmetric for UK and EU exporters. We estimate that a persistent doubling of the probability of Brexit at the average disagreement tariff of 4.5% lowers EU-UK bilateral export values by 15 log points on average, and more so for EU than UK exporters. Neither believed a trade war was likely.
JEL Classifications
  • F1 - Trade
  • F5 - International Relations, National Security, and International Political Economy