Blog Post

Tariffs and the American poor

What’s at stake: much has been said and debated — during the US election and beyond — about the distributional impact of free trade on the disadvantaged. But what would be the distributional impact of a new protectionism instead?

By: Date: January 23, 2017 Global Economics & Governance Tags & Topics

Currently, the US collects more than $33 billion a year – or roughly 0.2% of GDP – in tariffs, which are taxes on US imports. Furman, Ross and Shambaugh match import duties to standard consumer expenditure data and argue that tariffs likely impose a heavier burden on lower-income households, as these households generally spend more on traded goods as a share of expenditure/income and because of the higher level of tariffs placed on some key consumer goods.

For the US, they calculate — assuming that protection via tariffs does not induce domestic producers of similar goods to raise their prices at all — that the poorest 10% to 20% of households in the income distribution pay about $95 a year due to tariffs, middle-income households pay roughly $190, and the richest 10% about $500. In the figure below, we also show a range of higher tariff burdens that reflect some impact on prices of domestic goods (see Appendix note 6 for details).

blogsreview1

Tyler Moran at PIIE agrees that tariff would hit the poor hardest, and broadly operate as a regressive tax. He finds that the biggest contributor to the regressive impact of the US tariff schedule on lower income households is tobacco, but food and clothing tariffs also have a greater impact on poor households.

Fajgelbaum and Khandelwal also argue in a recent paper that individuals who consume different baskets of goods are differentially affected by relative price changes caused by international trade, and develop a methodology to measure the unequal gains from trade across consumers within countries. They also find that trade typically favors the poor, who concentrate spending in more traded sectors.

These findings are consistent with the cases of other countries. Beyza Ural Marchand finds similar results when estimating the distribution of welfare gains due to the trade reforms in India, by simultaneously considering the effect on prices of tradable goods and wages. The findings show that households at all per capita expenditure levels had experienced gains as a result of the trade liberalization, while the average effect was generally pro-poor and varied significantly across the per capita expenditure spectrum.

Jara and Ganoza examine the welfare effects on Peruvian households from the reduction of the effective tariff on yellow corn between 2000 and 2011. The study calculates the welfare effect of the tariff change on consumers of yellow corn’s main derivative product, chicken meat, which accounts for an important share in the household food expenditure basket. They show that, on average, the reduction in chicken meat retail prices induced by the tariff reduction for yellow corn generates a welfare gain of 0.24 per cent for households studies, and the poor households experience the highest welfare gain.

Another important aspect is variation of tariff impact across different demographic groups. Furman, Ross and Shambaugh argue that the tariff burden is highest for families with children, but particularly single parents. In addition, the average effective tariff on many categories of women’s apparel exceeds that for men’s apparel by a substantial margin, so the tariff burden among single parents may be even higher for single mothers than for single fathers.

blogsreview2

An older study by Edward Gresser also finds that single mothers are especially hit from the distributional consequences of tariffs. He also compares the impact of tariffs to that of other taxes. Overall, he argues that income taxes are fairly progressive; payroll taxes and excise taxes are more regressive, but the creation of the Earned Income Tax Credit gives poor families a way to offset at least part of the payroll tax. The effective tariff tax rate, in contrast to all other taxes, escalates rapidly for poorer families and has no offsetting credit comparable to the EITC.

blogsreview3


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Alice in gender-gap land

What’s at stake: The International Women’s Day on 8 March drew attention to the gender gap again, both in pay and in employment. Ongoing research on the topic shows that the gender gap persists worldwide, from finance to arts. For it to change, bold action is needed, ranging from targeted policies to rethinking gender norms.

By: Pia Hüttl Topic: Global Economics & Governance Date: March 20, 2017
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

Europe should lead the way with multilateralism

Despite the unique partnership with the USA, Europe needs to reflect on its place in an unstable world. Especially if the US Administration moves towards protectionism, the EU will need to build and deepen relationships with other partners.

By: Guntram B. Wolff Topic: Global Economics & Governance Date: March 16, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Taxing robots?

What’s at stake: “More human than human”, was the motto guiding the Tyrell Corporation’s engineering of biorobotic androids, in 1982’s Blade Runner. Fast forward to 2016, and Bill Gates argues that if robots perform human work, they should be taxed like humans. We review what economists think about this idea.

By: Silvia Merler Topic: Innovation & Competition Policy Date: March 13, 2017
Read about event More on this topic

Past Event

Past Event

Trump’s energy policy: America first, climate last?

This event seeked to discuss the potential way forward for the US energy and climate policy, and its implications for both global energy markets and global climate change mitigation efforts.

Speakers: Kristine Berzina, Tim Boersma, Connie Hedegaard, Simone Tagliapietra and Zhang Xumin Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 7, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

European identity and the economic crisis

What’s at stake: the EU prepares to mark the 60th anniversary of the Treaty of Rome, and the European Commission has presented a white paper “on the future of Europe”. However, some have argued that Europe is going through a serious identity crisis, whose roots are to be found in the economic crisis and whose implications could challenge further steps towards integration. We review the recent contributions to this debate.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: March 6, 2017
Read article More on this topic More by this author

Blog Post

photo2016

NAFTA in play: How President Trump could reshape trade in North America

How will the story of NAFTA unfold under the Trump presidency? Uri Dadush examines three possible scenarios and provides an overview of the policy implications for the various trading partners of the United States.

By: Uri Dadush Topic: Global Economics & Governance Date: March 1, 2017
Read article More on this topic More by this author

Blog Post

Simone Tagliapietra

Trump’s Energy Policy: America First, Climate Last?

What will the new US administration mean for the fight against global warming? Climate change is not even mentioned in the ‘‘America First Energy Plan’’, and Simone Tagliapietra fears a reversal of recent positive steps.

By: Simone Tagliapietra Topic: Energy & Climate Date: February 28, 2017
Read article More on this topic More by this author

Blog Post

dsc_0809

The Mexican automotive industry and Trump’s USA

Trade with Mexico is a controversial topic for the new US administration. And the automotive sector is emblematic of Trump’s promise to bring manufacturing jobs back to the USA. But a look at the numbers reveals risks in any shake-up of cross-border trade. 22% of US automotive exports to Mexico are later reimported as part of cars “made in Mexico”. And disrupting production chains could have repercussions around the world.

By: Filippo Biondi Topic: Global Economics & Governance Date: February 27, 2017
Read article More by this author

Blog Post

IMG_1985

The Trump market rally conundrum

What’s at stake: Since Donald Trump’s election in November, the US stock market has been on an unabated rally. The Dow Jones Industrial Average powered through the 20,000 mark for the first time in history. POTUS has been quick in using this financial bonanza as prima facie evidence of his early accomplishments. However, several commentators question the link between Trump’s unorthodox economic policy pledges, the stock market rally, and future growth prospects.

By: Alessio Terzi Topic: Finance & Financial Regulation, Global Economics & Governance Date: February 27, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Big data and first-degree price discrimination

What’s at stake: first-degree price discrimination - or person-specific pricing, had until recently been considered a theoretical case with unlikely real-world application. Yet the increasing availability of big data could make this possible. We review recent contributions on this issue.

By: Silvia Merler Topic: Innovation & Competition Policy Date: February 20, 2017
Read article Download PDF

Policy Brief

Screen Shot 2017-02-17 at 16.42.38

Europe in a new world order

In this paper the authors explore what the EU’s strategic reaction should be to US diminishing giant policies, and the EU’s role in a world of declining hegemony and shifting balances

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: February 17, 2017
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Inflation's comeback

What at stake: After years of deflationary pressures and anaemic economic performance, inflation seems to be on the rise again, both in the US and the euro area. Does this comeback mark a return to target? Will it be sustained, and what should central banks be thinking? These are among the questions raised in the blogosphere.

By: Pia Hüttl Topic: Global Economics & Governance Date: February 13, 2017
Load more posts