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 about event More on this topic

Past Event

Past Event

The current state and future of the world trading system

This event will discuss the current state of the multilateral trading system and how it might evolve in the future.

Speakers: Iana Dreyer, Marc Vanheukelen, Everton Vargas, André Sapir and Xia Xiang Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 19, 2018
Read about event More on this topic

Upcoming Event

Apr
25
07:45

What European trade policy in face of an emerging global trade war

On 25 April Bruegel is pleased to host Bernd Lange, Chair of the European Parliament's committee on International Trade.

Speakers: André Sapir, Bernd Lange and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Podcast

Podcast

Director's Cut: EU risks US tariff pain in standing by the WTO

As global trade war continues to unfold, Bruegel director Guntram Wolff is joined for this Director's Cut of 'The Sound of Economics' podcast by Bernd Lange MEP, chair of the Committee on International Trade (INTA), to discuss Europe's options.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: April 18, 2018
Read article More on this topic More by this author

Blog Post

The debate on euro-area reform

A paper jointly written by 14 French and German economists set off a debate about the reform of euro-area macroeconomic governance. We review economists’ opinions about it.

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 16, 2018
Read article More on this topic

Blog Post

Free trade in Africa: An important goal but not easy to achieve

The signing of the African Continental Free Trade Agreement and the Kigali Declaration may signal a new push towards economic integration on the African continent. However, it remains to be seen how many more countries sign up, how successfully 'phase two' is implemented later this year, and whether the agreement can be built upon to more comprehensively promote trade in services and a reduction of non-tariff barriers.

By: Marek Dabrowski and Yana Myachenkova Topic: Global Economics & Governance Date: April 13, 2018
Read article More on this topic

Blog Post

The European Globalisation Adjustment Fund: Time for a reset

It is only in the last decade that the EU has had an active policy to reintegrate workers who lost their jobs as a result of globalisation, through the European Globalisation Adjustment Fund (EGF). In this blog, the authors assess the performance of the Fund and make three recommendations to improve its effectiveness. To be more successful, the Fund should improve its monitoring and widen the scope of its usage.

By: Grégory Claeys and André Sapir Topic: European Macroeconomics & Governance Date: April 11, 2018
Read article More on this topic More by this author

Opinion

US Tariffs Aim to Contain China’s Technological Rise

While tension increases with each of the imports listed under the new tariffs, it now seems clear that the US are trying to slow down China's technological advances. Though such a protectionist attitude represents an obstacle, China should consider it an opportunity to strengthen relations with its Asian neighbours and the EU.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 10, 2018
Read article More on this topic More by this author

Opinion

What Are the Targets in the US–China Trade War?

Following the US announcement of new, high tariffs on imports, China is answering the Trump administration by applying its own series of tariffs. In this article, the author identifies the list of products that each country will be targeting, going beyond purely trade issues as each attempts to weaken the other.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 10, 2018
Read article More on this topic More by this author

Blog Post

Latvia’s money laundering scandal

Latvia’s third largest bank ABLV sought emergency liquidity from the ECB and eventually voted to start a process of voluntary liquidation, after being accused by US authorities of large-scale money laundering and having failed to produce a survival plan. What does it mean for the ECB?

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 9, 2018
Read article More by this author

Opinion

How Should the EU Position Itself in a Global Trade War?

It is high time for the EU to work on more than just wishful thinking in response to the US challenge to global trade. With the first cracks appearing in the multilateral system, it will be difficult for the EU to maintain a middle course between the US and China.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: April 5, 2018
Read article More on this topic More by this author

Blog Post

Milton Friedman's " The role of monetary policy" - 50 years later

In March 1968, Milton Friedman’s “The Role of Monetary Policy” - after his famous presidential address to the American Economic Association - was published in the American Economic Review. 50 years later, economists reflect on this famous work.

By: Silvia Merler Topic: Global Economics & Governance Date: April 3, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: A global trade triumvirate?

In this week’s Director’s Cut of ‘The Sound of Economics’ podcast, Bruegel director Guntram Wolff hosts a discussion with Bruegel fellows Alicia García-Herrero and André Sapir on where Europe will position itself between the two major trading powers of China and the United States if relations continue to cool.

By: The Sound of Economics Topic: Global Economics & Governance Date: March 27, 2018
Load more posts