IFO Institute research-Chinese exporters bear costs of Trump’s trade war

Import tariffs introduced by the United States and China in September will see Chinese exporters bear approximately 75% of the costs, with the US extracting a net welfare gain of USD 18.4 billion, according to new research from EconPol Europe.

The tariffs affect around 50% of Chinese products imported to the US, with a value exceeding USD 250 billion. The tariffs introduced by China affect around USD 60 billion worth of goods. The research shows these new tariffs, introduced on 24 September, will increase US consumer prices on affected Chinese products by an average of 4.5%, while the producer price of Chinese firms declines by 20.5%.

The strategically-levied US import duties on goods with high import elasticities will see Chinese firms pay approximately 75% of the tariff burden, and decrease exports of affected goods to the US by around 37%. The result will be a drop of 17% in the UUS-China trade deficit, say researchers, contrary to public opinion that the burden falls on American consumers.

The additional tariffs generate revenues of around USD 22.5 billion, which could subsequently be redistributed in the US. Authors Gabriel Gelbermayr and Benedikt Zoller-Rydzek say, although the tariffs introduce a distortion to US consumption decisions, the economic costs are shifted to Chinese exporting firms with the US government able to extract a net welfare gain of USD 18.4 billion.

“Tariffs are nothing else than taxes whose burden is shared between foreign producers and domestic users,” says report co-author Gabriel Felbermayr. “In the case of the US-China trade war, three quarters of the cost of US tariffs are indeed shifted to Chinese producers, with the US reaping very substantial revenue effects.”

The tariffs, which affect a range of consumer goods, are the latest round in an ongoing trade war between the US and China, with the Chinese government saying the US had “brazenly preached unilateralism, protectionism and economic hegemony.”

“That’s the problem with protectionism,” concludes EconPol researcher Felbermayr. “It can actually pay off economically for the US.”