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2018 Import Tariff Increases

Introduction

In 2018, the United States imposed tariffs on $283 billion worth of US imports, with rates ranging between 10 and 50 percent (Amit, Redding, and Weinstein (2019)). Amit, Redding, and Weinstein (2019) analyze the impact of the tariff. They note that the tariff led to a sharp and immediate price increase on goods subject to tariffs, with minimal movement in prices of other goods. They then document the reduction in purchases of these goods due to increased after-tax prices, which they use to quantify the net revenue provided by the tariff increase and discuss the deadweight loss imposed by the tariff.

In complementary work, Fajgelbaum et al. (2019) estimate the impact of these tariffs on prices and welfare. They use a trade model to incorporate substitution patterns of purchases away from goods subject to tariffs. They then use this model to estimate both the willingness to pay to avoid the tariffs and the net revenue to the government.

Finkelstein and Hendren (2020) form an MVPF of the 2018 tariff increases using estimates from both of these models. This page provides the estimates from Amit, Redding, and Weinstein (2019) but also discusses the estimates from Fajgelbaum et al. (2019) below.

MVPF = 1.5

Net Cost

Amit, Redding, and Weinstein (2019) estimate that the 2018 tariffs raised $15.6B in revenue. This is the sum of a ‘mechanical’ component of $32B (the revenue that would have been raised has quantities purchased not changed) and a behavioral component of -$16.4B due to the reduction in purchases of goods that were subject to higher prices.

$15.6B Net Cost

Willingness to Pay

To construct the willingness to pay to avoid the tariff increase, Finkelstein and Hendren (2020) begin by noting that if the tariffs were thought of as “small”, the willingness to pay would be equal to the mechanical cost of $32B. Intuitively, an individual who consumes $1 of a good is willing to pay $0.01 to avoid a $.01 increase in it’s price. However, the tariffs were of course not “small” – the price increases were quite large.

The first dollar of the tariff raises revenue proportional to $32 billion. But, as the tariffs are further increased, individuals consume fewer imported goods and the realized revenue from the tariff is estimated to be $16.4B lower as a result. The key question is how much of the $16.4B is a welfare loss to the individuals. On the one hand, this reduction in revenue could be driven by a substitution response to the first dollar of the tariff, so that individuals are able to substitute away from the tariff. This would mean that individuals are approximately willing to pay the cost of the tariff, $15.6B, to avoid the price increase. On the other hand, it may be that the last dollar of the tariff leads individuals to substitute away from the tariff goods. In this instance, individuals would be willing to pay roughly the mechanical cost of the tariff of $32B to avoid the price increase. Absent knowledge of the entire demand curve, it is natural to assume that individuals substitute in a linear fashion in response to the price increase so that the willingness to pay to avoid the tariff is an average of $15.6B and $32B, which equals $23.8B.

$23.8B WTP

MVPF Summary

Combining the willingness to pay and net cost implies an MVPF of 23.8/15.6 = 1.5. Every $1 raised by the tariff imposes a $1.50 welfare loss on US consumers.

Finkelstein and Hendren (2020) note that this calculation does not account for potential changes in prices of other non-tariff goods (e.g. exported goods through terms-of-trade effects). To that aim, Finkelstein and Hendren (2020) also report estimates of the MVPF using results from Fajgelbaum et al. (2019), who also study the 2018 tariff increase. Fajgelbaum et al. (2019) use a trade model to capture the price changes of substitutes and complements for each product. They then use their model to estimate the willingness to pay and revenue raised from the reform. They estimate that the tariff raised $34.3B in revenue and that US residents would have a combined willingness to pay of $41.6B to avoid the tariff increases. This implies an MVPF of 1.2. Every $1 of government revenue raised through the tariff would impose $1.20 in welfare losses to US consumers.

1.5 MVPF

References

Amiti, Mary, Stephen J. Redding, and David E. Weinstein (2019). “The Impact of the 2018 Tariffs on Prices and Welfare.” Journal of Economic Perspectives 33(4): 187-210.
https://www.aeaweb.org/articles?id=10.1257/jep.33.4.187

Fajgelbaum, Pablo D., et al. (2020). “The Return to Protectionism.” The Quarterly Journal of Economics 135(1): 1-55.
https://academic.oup.com/qje/article/135/1/1/5626442

Finkelstein, Amy, and Nathaniel Hendren (2020). “Welfare Analysis Meets Causal Inference.” Journal of Economic Perspectives, 34(4): 146-67. https://pubs.aeaweb.org/doi/pdf/10.1257/jep.34.4.146

Policy Features

Category: Taxes
Beneficiary Type(s): Adults
Country of Implementation: United States
Year of Implementation: 2018
Empirical Method: Difference in Differences
Research Type: Secondary
Peer Reviewed: Yes
MVPF Publication Link: pubs.aeaweb.org/doi/pdf/10.1257/jep.34.4.146