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Hey there, #econtwitter. Today in my first-ever tweet I am happy to share my new working paper about the ~Global Trade War~ with Pablo Fajgelbaum, @Penny_WB , and Amit Khandelwal. Paper here, and full thread of charts and takeaways to follow >> econ.ucla.edu/pfajgelbaum/RT…
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First, the basics. In 2018 the US imposed steep tariff increases on more than 12,000 import products, worth ~$300 billion annually.
In response, trade partners retaliated with steep tariff increases on more than 3,000 US export products, worth ~$100 billion annually.
First, the basics. In 2018 the US imposed steep tariff increases on more than 12,000 import products, worth ~$300 billion annually.
In response, trade partners retaliated with steep tariff increases on more than 3,000 US export products, worth ~$100 billion annually.
2/N
Our study detects large and immediate impacts of these tariffs on trade flows.
We estimate that, on average, the value of targeted US imports declines ~30% in response to the tariffs...
Our study detects large and immediate impacts of these tariffs on trade flows.
We estimate that, on average, the value of targeted US imports declines ~30% in response to the tariffs...
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...while US exports also fall sharply.
Notably, we find "full pass-through" -- meaning that the costs of tariffs are paid entirely by US purchasers, and are not offset by foreign sellers lowering their prices.
...while US exports also fall sharply.
Notably, we find "full pass-through" -- meaning that the costs of tariffs are paid entirely by US purchasers, and are not offset by foreign sellers lowering their prices.
4/N
In a structural estimation, we calculate annual losses to US purchasers due to higher prices at $69 billion.
But after accounting for higher tariff revenue and gains to domestic producers from higher prices, the aggregate welfare loss is just ~$6 billion (0.03% of GDP).
In a structural estimation, we calculate annual losses to US purchasers due to higher prices at $69 billion.
But after accounting for higher tariff revenue and gains to domestic producers from higher prices, the aggregate welfare loss is just ~$6 billion (0.03% of GDP).
5/N
Now, the US is a big country and not very dependent on trade, so it makes sense that aggregate impacts of the trade war would be small.
But this masks distributional effects in favor of producers over consumers, and unequal impacts across different regions of the US.
Now, the US is a big country and not very dependent on trade, so it makes sense that aggregate impacts of the trade war would be small.
But this masks distributional effects in favor of producers over consumers, and unequal impacts across different regions of the US.
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Why do domestic producers benefit from higher prices?
Higher import costs induce US purchasers to buy more domestic products instead. This pushes up the price of goods that the US makes, sells, and exports.
So protected US producers benefit, but consumers are worse off.
Why do domestic producers benefit from higher prices?
Higher import costs induce US purchasers to buy more domestic products instead. This pushes up the price of goods that the US makes, sells, and exports.
So protected US producers benefit, but consumers are worse off.
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Moreover, the impacts of the trade war are unequally distributed across the US because different regions specialize in different sectors.
Moreover, the impacts of the trade war are unequally distributed across the US because different regions specialize in different sectors.
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For instance, this map shows that sectors concentrated in the Great Lakes region of the Midwest and the industrial areas of the Northeast received the most protection from import tariffs. (Think steel tariffs.)
For instance, this map shows that sectors concentrated in the Great Lakes region of the Midwest and the industrial areas of the Northeast received the most protection from import tariffs. (Think steel tariffs.)
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By contrast, US trade partners retaliated heavily against agriculture exports produced in the Great Plains and Mountain West. (Think soybean tariffs.)
By contrast, US trade partners retaliated heavily against agriculture exports produced in the Great Plains and Mountain West. (Think soybean tariffs.)
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Why did the US choose to raise tariffs on some imports but not others?
We can't read the President's mind, of course, but we find suggestive evidence that the White House targeted electorally competitive counties.
Why did the US choose to raise tariffs on some imports but not others?
We can't read the President's mind, of course, but we find suggestive evidence that the White House targeted electorally competitive counties.
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By contrast, foreign governments retaliated against US exports produced in rural, conservative counties -- likely targeting the GOP base.
As a result of these retaliations, we estimate that very Republican counties are hit hardest by the trade war.
By contrast, foreign governments retaliated against US exports produced in rural, conservative counties -- likely targeting the GOP base.
As a result of these retaliations, we estimate that very Republican counties are hit hardest by the trade war.
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For the trade wonks, there's much more in the paper about the data, our identification strategy, pre-trend checks, anticipatory effects, the structural estimation, mechanisms, and alternative hypotheses about political economy drivers. econ.ucla.edu/pfajgelbaum/RT…
For the trade wonks, there's much more in the paper about the data, our identification strategy, pre-trend checks, anticipatory effects, the structural estimation, mechanisms, and alternative hypotheses about political economy drivers. econ.ucla.edu/pfajgelbaum/RT…
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We look forward to receiving comments and improving the paper in the months ahead.
We look forward to receiving comments and improving the paper in the months ahead.
