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 on this topic More by this author

Blog Post

An irrational choice: behavioural economist wins Nobel Prize

Richard Thaler was awarded this year's Nobel Prize in Economics for his contributions to the field of behavioural economics. His work documents a set of cognitive biases affecting economic decision-making and casts doubt on commonly-held assumptions about the rational ‘homo economicus’ that inhabits economic models and theories. What are the implications for the economics discipline and public policy?

By: Konstantinos Efstathiou Topic: Global Economics & Governance Date: October 16, 2017
Read article More on this topic More by this author

Blog Post

On the cost of gun ownership

On 1 October 2017, 59 people were killed and another 489 injured in what is currently the deadliest mass shooting in US modern history. The author reviews recent contributions on the economic cost of gun violence, as well as the impact of regulation.

By: Silvia Merler Topic: Global Economics & Governance Date: October 11, 2017
Read about event More on this topic

Past Event

Past Event

EU - CELAC Economic Forum - Channels for a joint future

On 11 October Bruegel together with GIGA and Real Instituto Elcano will organise a conference on relations between the EU and the Community of Latin American and Caribbean States.

Speakers: Paola Amadei, Angel Badillo, Paulo Carreño King, Linda Corugedo Steneberg, Gonzalo de Castro, Gonzalo Gutiérrez, Bert Hoffmann, Edita Hrdá, Ramón Jáuregui, Emilio Lamo de Espinosa, Eduardo Levy Yeyati, Gabriel Lopez, Enrique Medina Malo, Maryleana Méndez Jiménez, Luicy Pedroza, Mario Pezzini, Mario Soares, Everton Vargas, Dylan Vernon and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 11, 2017
Read article

Blog Post

India’s trade ties with the UK and EU

As EU and Indian leaders meet in Delhi, we look at the figures on trade. The UK’s place in the relationship warrants special attention. EU-India trade has more than tripled since 2000, but UK-India trade is largely static. The shift is especially noticeable for EU exports to India, where the UK share has dropped from 29% to 10%.

By: Maria Demertzis and Alexander Roth Topic: European Macroeconomics & Governance, Global Economics & Governance Date: October 6, 2017
Read article More on this topic More by this author

Blog Post

The Economics of Healthcare

Healthcare reform has been a thorn in the side of the US administration for several months, prompting President Trump to declare that “Nobody knew that healthcare could be so complicated.” We review recent economists’ views on the issue.

By: Silvia Merler Topic: Global Economics & Governance Date: October 2, 2017
Read article More on this topic More by this author

Blog Post

The Fed’s Unwinding

The Federal Open Market Committee (FOMC) held short-term interest rates steady on September 20th and announced that starting from October 2017 the Fed will gradually shrink its balance sheet, which grew considerably in response to the Great Recession. We review economists’ views on this move.

By: Silvia Merler Topic: Global Economics & Governance Date: September 25, 2017
Read article More on this topic More by this author

Blog Post

Global Imbalances

The recent IMF’s External Sector Report highlighted the persistence of imbalances and a switch of imbalances towards advanced economies. We review recent contributions on this topic.

By: Silvia Merler Topic: Global Economics & Governance Date: September 21, 2017
Read article More by this author

Podcast

Podcast

Surprising priorities for Europe and China

Bruegel’s Alicia García-Herrero and Robin Niblett of Chatham House discuss a new joint report on EU-China relations. How easy was it to find common ground with Chinese partners? And what should be the priorities for economic cooperation between Europe and China?

By: The Sound of Economics Topic: Global Economics & Governance Date: September 13, 2017
Read about event More on this topic

Past Event

Past Event

EU-China economic relations: looking to 2025

This event will see the launch of a report on EU-China relations and discuss issues such as trade and investment, industrial cooperation and innovation and global governance

Speakers: Victor Chu, Ian Davis, Alicia García-Herrero, Dame Clara Furse, Tony Graziano, Anatole Kaletsky, K.C. Kwok, Lawrence J. Lau, Ina Lepel, Hanna Müller, André Sapir, Robin Niblett, György Szapáry, Jean-Claude Trichet, Zhang Yansheng, H.E. Ambassador Yang Yanyi, Liu Xiangdong, Gunnar Wiegand, Guntram B. Wolff, Huang Ping and Elena Flores Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 13, 2017
Read article More on this topic More by this author

Opinion

Hong Kong should add the euro to its dollar peg

Volatility offers an opportunity for the territory to rethink its strategy. With the economy now more synchronised with China than ever before, the dollar peg may no longer provide an accurate reflection of the real value of the Hong Kong dollar.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 12, 2017
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2017

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates and small private sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe.

Speakers: Carlos Sallé Alonso, José Antonio Álvarez Álvarez, Agnès Bénassy-Quéré, Pervenche Béres, Matthias Buck, Grégory Claeys, Zsolt Darvas, Jean Luc Demarty, Maria Demertzis, Anna Ekström, Lowri Evans, Ferdinando Giugliano, Sandro Gozi, Peter Grünenfelder, Reiner Hoffmann, Levin Holle, Kate Kalutkiewicz, Steffen Kampeter, Peter Kažimír, Emmanuel Lagarrigue, Matti Maasikas, Steven Maijoor, Reza Moghadam, Nathalie Moll, James Murray, Johan Van Overtveldt, Julia Reinaud, André Sapir, Dirk Schoenmaker, Mateusz Szczurek, Marianne Thyssen, Jean-Claude Trichet, Reinhilde Veugelers, Nicolas Véron, Ida Wolden Bache, Liviu Voinea, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Square - Brussels Meeting Centre Date: September 7, 2017
Read article More on this topic More by this author

Blog Post

Hurricane Harvey’s economic impact

What’s at stake: tropical storm Harvey has caused unprecedented and catastrophic flooding in southeastern Texas. We review recent estimates of the economic impact of this natural disaster.

By: Silvia Merler Topic: Global Economics & Governance Date: September 4, 2017
Load more posts