Do Import Tariffs Protect U.S. Firms?

Skip to comments.

Posted on 12/06/2024 7:49:03 AM PST by karpov

One key motivation for imposing tariffs on imported goods is to protect U.S. firms from foreign competition. By taxing imports, domestic prices become relatively cheaper, and Americans switch expenditure from foreign goods to domestic goods, thereby expanding the domestic industry. In a recent Liberty Street Economics post, we highlighted that our recent study found large aggregate losses to the U.S. from the U.S.-China trade war. Here, we delve into the cross-sectional patterns in search of segments of the economy that may have benefited from import protection. What we find, instead, is that most firms suffered large valuation losses on tariff-announcement days. We also document that these financial losses translated into future reductions in profits, employment, sales, and labor productivity.

During the 2018-19 U.S.-China trade war, the U.S. levied 10 to 50 percent import tariffs on more than $300 billion of imports from China (and some other countries). To understand why tariffs can cause the domestic industry to shrink, we need to distinguish between tariffs on inputs and outputs. The focus is usually on industry output tariffs; for example, higher tariffs on cars can protect the domestic car industry because the higher tariff-inclusive price of imported vehicles makes consumers switch to domestic cars. But, U.S. import tariffs were largely levied on industry inputs, for example, steel. Input tariffs raise the cost of producing final goods like cars in the U.S., making domestic production less competitive. However, foreign firms do not need to pay for these tariffs when producing in their markets. As a result, higher input tariffs make it difficult for U.S. producers to compete with foreign firms exporting to the U.S. market or in U.S. export markets.

Whether U.S. firms benefit from import protection depends on the net effect, that is, the “effective rate of protection.”

(Excerpt) Read more at libertystreeteconomics.newyorkfed.org ...

Click here: to donate by Credit Card

Or here: to donate by PayPal

Or by mail to: Free Republic, LLC - PO Box 9771 - Fresno, CA 93794

Thank you very much and God bless you.

1 posted on 12/06/2024 7:49:03 AM PST by karpov

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

FreeRepublic.com is powered by software copyright 2000-2008 John Robinson