The US-China Trade War Is Harming Communities in the US

Michael Waugh

By Michael Waugh

These results have policy implications for short-run demand management policy in the US and the appropriate response to the trade war.

By Michael Waugh

Trade creates winners and losers. In the context of the US-China trade war – the unprecedented tit-for-tat increase in tariffs by the US and China – this maxim suggests that changes in US and Chinese trade policy will redistribute the gains from trade. I argue that empirical evidence supports the theory – the trade war is inducing concentrated losses in consumption and employment for communities in the US that are the most exposed to Chinese retaliatory tariffs.

The costs of the trade war 

The trade war affects welfare through two mechanisms. Trade benefits consumers through lower prices and increased variety. In the context of the US-China trade war, the expectation is that US tariffs on Chinese goods will impose hardship on all US consumers through higher prices and a reduction in variety. This prediction is becoming apparent as several studies (Fajgelbaum et al. 2019, Amiti et al. 2019, Cavallo et al. 2019) find that the US tariffs are leading to higher prices and a reduction in welfare for all consumers.
From a US worker’s perspective, there is a second hardship of the trade war. Retaliatory Chinese tariffs on US exports affect labour income and/or production opportunities for those directly impacted, such as the farmers or workers engaged in agriculture and manufacturing production that China targeted with retaliatory tariffs. Unlike price effects – which are spread widely across the US population – this ‘labour income channel’ is concentrated: those who had a position of comparative advantage for the Chinese market and lost it due to tariffs bear this burden of the trade war alone.

Read the full Vox article.

Michael Waugh is an Associate Professor of Economics.