Latest China Tariffs Will Cost American Households $831 Per Year, Fed Says

It’s tempting to believe President Trump’s insistence that Chinese companies will bear the costs of US tariffs, but this simply isn’t true…

from Zero Hedge

It’s tempting to believe President Trump’s insistence that Chinese companies will bear the costs of US tariffs, but as a chorus of emergent trade experts have pointed out, this simply isn’t true.

American consumers will bear at least some of the costs of the new tariffs, though the extent will depend on how companies react to the new taxes (that is, whether they will pass it on to consumers, tolerate the gross margin hit, or decide to rejigger their supply chains).

But as analysts scramble for a ‘ballpark’ figure representing how much this latest round of tariff escalation (going to 25% from 10% on $200 billion in Chinese goods) will cost the average American household, a team of researchers working with the Federal Reserve Bank of New York have an answer of their own: $831.

That figure stems from an update of methodologies the team devised last year. Their calculations are based on two categories: taxes and ‘dead weight’ costs.

A ‘dead weight’ cost is incurred when tariffs push a company to find a new, less efficient source for a given product. For example: If a given Chinese import is hit with a 10% tariff, a company can either choose to pay the additional $10 per $100 in taxes, or it can find another producer of the same product that isn’t subject to tariffs. Say, for example, the company switches to importing the products from a Vietnamese factory where, because the factory isn’t as efficient, the same product for which the company once paid $100 will instead cost $109.

As of November 2018, the researchers calculated that American companies were paying $3 billion per month in added taxes, while shouldering another $1.4 billion in deadweight losses. Annualized, this amounts to $52.8 billion, or $414 per household.

The team plugged in the new tariff rates and came up with a new number: $831 per household per year. Though there is one other factor that they had to account for. Tariffs and deadweight costs don’t rise proportionally. Rather, as tariffs increase, more companies opt to shift to cheaper producers. Oftentimes, the tax revenue collected by the government actually falls. This is ultimately a net negative for the economy because, while tax revenue can theoretically be rebated (in the form of spending like, say, a farm bailout) losses to inefficiencies are simply lost.

The Fed’s estimate is hardly the most extreme: A study published late last year by ImpactECON and commissioned by Koch-supported lobbyists warned that the tariffs, as they stood before the most recent escalation, would cost households $2,000 per year.

But if the researchers are correct, and the tariffs stir up more of that inflation the Fed has been waiting for, it could quickly become a self-perpetuating cycle of rising costs as the central bank confronts the fact that it has ‘no choice’ but to raise interest rates.