America's pursuit of low-cost overseas production and China's thirst for export markets have resulted in industrial decline in the U.S. and raised serious questions about national security. An economic decoupling from China is now actively discussed in Washington. We model the economic impact of a permanent 25% across-the-board tariff on imports from China to study its macroeconomic effects. We find significant gains in GDP and employment and a large reorientation of U.S. supply chains.
Keywords Tariff * International trade * Supply chain * Firm location
In 2018, the United States initiated the first broad-based tariffs on imports in 87 years. The results of this real-world economic experiment have accorded with economists' expectations in some ways but defied them in others. For example, with a small number of exceptions, U.S. tariffs have not led to price increases in consumer goods as was widely expected. The effects of tariffs in today's interconnected global economy are not well known due to limited recent experience. In this study, we build an economic model of U.S.-China trade to study the effects of a permanent tariff on U.S. imports from China. Our model is based on a combination of observed experience and economic theory.
We employ a novel methodology that combines sector-by-sector analysis of 142 industries that make up U.S. imports from China with a standard macroeconomic forecasting model of the U.S. economy. The industry-specific model enables us to forecast the rate at which production in China of goods for export to the U.S. migrates out of China to other locations. Plentiful experience in the past 2 years has shown Electronic supplementary material The online version of this article (https://doi.org/10.1057/sl 1369-019-00141-8) contains supplementary material, which is available to authorized users. that U.S. multinationals are able to relocate production more aggressively and more quickly than many thought possible before 2017.
We are interested in the impact of permanent tariffs on China, because this is one potential path to decouple the U.S. economy from the Chinese economy. Further, the impact of a permanent tariff would be stronger than today's temporary tariffs, which are subject to repeal at any moment. Permanent tariffs would disadvantage China as a site for U.S. companies' production for the long term, and to a lesser extent for all production for global markets. As the world's largest consumer market and largest importer in many categories of finished goods, the U.S. has a large impact on world markets and business location decisions. We model the effects of a permanent, across-the-board 25% tariff (henceforth PATB25) on all U.S. imports from China. We also run a non-tariff economic forecast using our macroeconomic model to provide a baseline comparison. We then compare the two cases to quantify the impact of the PATB-25 tariff.
Our production location model estimates that by 2024, 45% of U.S. imports from China leave for third countries. Using independent sources on international manufacturing cost comparisons, we find that the average cost of U.S. imports falls 4.3% in 2024 as compared to the baseline...