Impact Of US Tariffs On American Households and Firms

The US President Donald Trump has been criticized by economists from around the world for his protectionism trade policies, against the country’s trade partners. His arguments in support of trade protectionism include the increased government revenue and reduced competition from foreign firms. The US collects an annual revenue of US$33 billion from tariffs, or about 0.2 per cent of its GDP. In 2018, the US government collected an additional US$14.4 billion from newly imposed tariffs. You may sign up for economics tuition with Economics Cafe Learning Centre, the best economics tuition centre founded by best economics tutor in Singapore, Mr Edmund Quek to learn more about tariffs and its economic implications.

Tariffs are Regressive in Nature

Trump has overlooked, or purposely played down the fact that unlike other taxes, the tariffs are a regressive tax that weighs most heavily on low income households. Take the imported goods from China for example. Low income households in the US will most likely turn to imported goods from China due to their lower prices as compared with domestic goods. With tariffs imposed on these imported goods, their option is between paying higher prices for the same imported goods from China or close substitutes produced by domestic firms. In either case, these consumers lose off by consuming less quantities of goods as a result of higher prices. You may consult your economics tutor in economics tuition for the definition of regressive tax.

According to studies, assuming that domestic firms do not increase their prices, low income households (bottom 10 percentile) will pay an additional US$95 as a result of tariffs, or over 1.5 per cent of their household income after tax. In comparison, high income households (top 10 percentile)  will pay an additional US$500 as a result of tariffs, or less than 0.3 per cent of their household income after tax. Therefore, tariffs impose a much heavier burden on low income households than high income households. With guidance from your economics tutor in your economics tuition class, list the various types of regressive taxes in the US.

Costs of US Tariffs Fall Largely on US Households and Firms

Contrary to Trump’s tweets that Chinese exporters will bear the cost of tariffs, studies found that consumers in the US bear most of the costs of higher tariffs on goods imported from China. According to the recent National Bureau of Economic Research Paper, there is no visible reduction in the prices charged by Chinese exporters. Further, the higher tariffs have led to an increase in prices charged by domestic firms producing goods in competition with the tariff affected, imported goods from China. In consultation with your economics tutor in economics tuition, explain why tariffs will lead to higher inflation in the US. Mr Edmund Quek, principal economics tutor of Economics Cafe Learning Centre, a premier economics tuition centre in Bishan is known for incorporating real world events into his teaching. You may visit the economics tutor’s website to check out his economics tuition class schedule.

American exporters also suffer from increased tariffs on Chinese goods. First of all, to those firms who import raw materials from China, their manufacturing cost will increase as a result of the tariffs. For example, steel now cost much more with a 25 per cent tariff on raw materials imported from China. Apart from steel, electronics, rubber commodities and agricultural products are also affected. Secondly, firms who export their products to China will suffer from counter tariffs imposed by the Chinese government. For example, soybean exports from the US are now subject to retaliatory tariffs imposed by the Chinese government. China is among the biggest export markets for the farmers in the US. The reduced demand as a result of counter tariffs on various agricultural products from the US will lead to reduced profitability of these farmers and affect their families’ livelihood. Thirdly, lower demand for the imported Chinese goods as a result of higher tariffs will depress the value the Chinese Yuan, which may lead to its depreciation. The depreciation of Chinese Yuan will make the goods from the US relatively more expensive and hence worsen the problem faced by the US exporters.

Linda Geng

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