Research Highlights

The Consumption Response to Trade Shocks: Evidence from the US-China Trade War

Michael Waugh

New study from NYU Stern’s Michael Waugh finds China’s retaliatory tariffs impede US consumption and contribute to declining employment

New study from NYU Stern’s Michael Waugh finds China’s retaliatory tariffs impede US consumption and contribute to declining employment

While the ongoing US-China trade war continues to dominate media headlines, the policy implications stretch beyond Washington DC, harming American communities. Recent research by NYU Stern Professor Michael Waugh provides new evidence on the consumption effects of trade shocks, finding that Chinese retaliation is leading to welfare losses. Communities most exposed to the Chinese retaliatory tariffs have experienced gross declines in consumption growth and employment, the research notes. 

Waugh’s paper, “The Consumption Response to Trade Shocks: Evidence from the US-China Trade War,” was motivated by the desire to measure the labor-market-induced consumption effects of trade, a topic that has not previously been examined, and to understand the economic consequences of the US-China trade war. Analyzing new auto sales at the US county level between 2017-2018, Waugh found that high-tariff counties experienced a 3.8 to 5.5 percentage point decline in new auto sales growth relative to low-tariff counties, illustrating a clear decline in consumption growth. 

His research further shows that the consumption response corresponds with a decline in employment growth. Waugh found that the Chinese retaliatory tariffs reduced a county’s total exports and therefore negatively affected the labor market, especially its segments most sensitive to trade. Employment growth was 1 to 1.5 percent lower in high-tariff counties relative to low-tariff counties. Additionally, the data suggests that it was hard for counties relatively more exposed to Chinese tariffs to replace these lost export opportunities by simply redirecting exports to other destinations.

As trade talks between the US and China continue, Waugh notes it is imperative to understand the negative economic impact on specific areas of the US.  

“This paper’s main result provides new evidence that changes in Chinese trade policy are leading to concentrated welfare losses,” writes Waugh. “While the current situation in the US is self-induced, the results of this paper validate a broader point: policy should be cognizant of the distributional effects associated with changes in trade exposure and trade policy.”
 
Professor Waugh’s paper was published in October in The National Bureau of Economic Research. Read the full paper here