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 Topic: Global Economics & Governance

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 by this author

Blog Post

The DSGE Model Quarrel (Again)

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 11, 2017
Read article More on this topic

Blog Post

Promoting intra-regional trade in the south of the Mediterranean

Regional integration is still a sure way for economies in development to achieve economic growth on the global market. The south of the Mediterranean has still a low level of intra-regional trade integration, dominated by some overlapping trade agreements and political instability. The EU has the opportunity to play a decisive role, promoting and coordinating the process.

By: Filippo Biondi and Maria Demertzis Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More by this author

Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Francesco Chiacchio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 5, 2017
Read article More by this author

Blog Post

The Bitcoin Bubble

The price of bitcoin has just passed $11,000. A year ago it was worth less than $800. Economists and commentators are thus increasingly concerned that this may be a bubble waiting to burst. We review recent opinions on the topic.

By: Silvia Merler Topic: Finance & Financial Regulation, Global Economics & Governance Date: December 4, 2017
Read article More on this topic More by this author

Blog Post

The Republican Tax Plan

As the Trump administration’s tax plan continues its way through the legislature, we review economists’ and commentators’ recent opinions on the matter.

By: Silvia Merler Topic: Global Economics & Governance Date: November 27, 2017
Read article More on this topic More by this author

Blog Post

Has the Phillips curve disappeared?

The Phillips curve prescribes a negative trade-off between inflation and unemployment. Economists have been recently debating on whether the curve has disappeared in the US and Europe. We report some of the most recent views.

By: Silvia Merler Topic: Global Economics & Governance Date: November 21, 2017
Read article Download PDF More on this topic

External Publication

Central Asia—twenty-five years after the breakup of the USSR

Central Asia consists of five culturally and ethnically diverse countries that have followed different paths to political and economic transformation in the past 25 years. The main policy challenge for the five Central Asian economies is to move away from commodity-based growth strategies to market-oriented diversification and adoption of a broad spectrum of economic, institutional and political reforms

By: Marek Dabrowski and Uuriintuya Batsaikhan Topic: Global Economics & Governance Date: November 14, 2017
Read article More on this topic More by this author

Blog Post

Powell's Federal Reserve

With the appointment of Jerome Powell as the next Fed’s chairman, President Trump break a tradition of bipartisan re-nomination and chooses someone who is not an economy by formation. We review economist’s opinions on this choice and the challenges ahead.

By: Silvia Merler Topic: Global Economics & Governance Date: November 13, 2017
Read about event More on this topic

Past Event

Past Event

A conversation on USA economic policy with Kevin Hassett

This is an invitation-only event for Bruegel's member and for a selected number of experts.

Speakers: Kevin Hassett Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 9, 2017
Read article More on this topic More by this author

Blog Post

The Bank of England’s dovish hike

For the first time since 2007, the Bank of England raised interest rates, with a hike of 25 basis points. At the same time, it provided forward guidance that outlines a very gradual path for future increases. We review the economic blogosphere’s reaction to this decision.

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

Blog Post

Falling Pound might not bring UK trade balance boost

The Pound Sterling depreciated by 14% against a basket of world currencies in the four months after the referendum vote to leave the EU. A number of pundits claimed that this would improve the UK trade balance and boost the economy. But the data do not show any visible improvement in the trade balance to date. Could it be that currency depreciations have less impact on trade balances than before?

By: Nicholas Branigan Topic: European Macroeconomics & Governance Date: October 31, 2017
Read article More on this topic More by this author

Blog Post

The capital tax cut debate

How much do workers gain from a capital gains tax cut? CEA chairman Hasset claims the tax cut will cause average household labour income to increase by between $4000 and $9000. Several commentators note this implies that more than 100% of the incidence of the tax is on labour. This question has triggered a heated discussion in the economic blogosphere, which we review here.

By: Silvia Merler Topic: Global Economics & Governance Date: October 30, 2017
Load more posts