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      Why the US-China Tariff Standoff Hurts American Companies More
      Research & Ideas
      Why the US-China Tariff Standoff Hurts American Companies More
      26 Jun 2019Research & Ideas

      Why the US-China Tariff Standoff Hurts American Companies More

      by Danielle Kost
      26 Jun 2019|by Danielle Kost
      US exporters have been slashing the prices of goods they sell to China to offset higher trade costs, but Chinese exporters are passing those costs to American companies, research by Alberto F. Cavallo says.
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      "We are the 'piggy bank' that everyone wants to take advantage of," President Donald Trump told his 61 million Twitter followers in May, days after he hiked tariffs on $200 billion worth of Chinese goods. "NO MORE!""

      But research by Harvard Business School's Alberto F. Cavallo suggests that American companies—and more recently, consumers—are bearing the brunt of the trade war with China, whose government has been retaliating with its own import tax increases. US exporters, particularly farmers selling commodities in competitive global markets, have had to significantly cut their prices, while Chinese exporters have not reduced the prices of the goods they sell to US importers.

      "This nearly complete pass-through of tariffs to the total price paid by importers suggests the tariff incidence has fallen largely on the US,” Cavallo and his research colleagues said in the working paper, Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy.

      The US-China trade tensions, which have been roiling global stock markets, will likely dominate conversations when leaders from Group of 20 nations gather on Friday for a two-day meeting in Osaka, Japan. Trump said on Twitter last week that he would have an "extended meeting" with President Xi Jinping of China at the summit, a welcome development for rattled investors and other world leaders.

      Cavallo's research offers more urgency for the US to resume the negotiations that broke down in May. He teamed with prominent economists to study price data from June 2018—the month before the trade war began—to early 2019. Their work combines import and export prices at the US border, collected by the Bureau of Labor Statistics, with retail prices collected by the Billion Prices Project at Harvard Business School. They found:

      • US importers are bearing most of the tariff increase. The pre-tariff import price of a Chinese item with a 10 percent levy only fell by 0.6 percent even 10 months after the trade war began, leaving American companies to pick up the remaining 9.4 percent of the increase post-tariff.
      • US exporters dropped their prices to compete. During the two years leading up to Trump's first round of tariffs, export prices on affected goods had been growing by 4 percent a year, roughly double the rate of unaffected items. That trend ended in July, when prices of goods affected by the retaliation tariffs started falling by 5 percent, on average. 
      • US retailers partially absorbed the tariffs. In-progress analyses of retail prices show more heterogeneity, with some retailers passing higher import costs to consumers of some goods, such as washing machines, while accepting lower profit margins for other products, such as those from China. Overall, Cavallo and his colleagues found little difference between the impact on prices of affected and unaffected goods. The comparison indicates that many retailers are softening the blow for consumers—at least, for now.

      First companies, then consumers

      Large American companies are unlikely to buckle under the weight of tariffs. In fact, a National Bureau of Economic Research study released in March suggested that companies unaffected by higher import taxes were raising their prices anyway to take advantage of consumers' willingness to pay more. And companies including Walmart and Home Depot have said they would eventually pass higher trade costs to customers.

      While Trump has stood by his tariff strategy—calling the taxes a “beautiful thing”—executives' patience for the levies is wearing thin. Earlier this month, leaders from more than 600 companies and trade groups shared their frustrations in a letter to Trump as part of the “Tariffs Hurt the Heartland” advocacy campaign.

      "We remain concerned about the escalation of tit-for-tat tariffs," the letter says. "We know firsthand that the additional tariffs will have a significant, negative, and long-term impact on American businesses, farmers, families, and the US economy."

      New research by a Washington-based think tank supports those fears. The nonpartisan Peterson Institute for International Economics said in a June 12 report that China has been lowering other countries' export tariffs to help Chinese importers find the goods they need from non-American suppliers.

      Cavallo, the Edgerley Family Associate Professor of Business Administration, conducted the tariff analysis with Gita Gopinath, director of research at the International Monetary Fund and an economics professor at Harvard University; Brent Neiman, a professor at the University of Chicago; and Jenny Tang, senior economist at the Federal Reserve Bank of Boston.

      Danielle Kost is senior editor of Harvard Business School Working Knowledge.
      [Image: narvikk]

      Related Reading

      • The UK Needs a Bold Strategy Around Competition to Survive Brexit
      • Free Trade Needs Nurturing—and Other Lessons from History
      • Op-Ed: The Trouble with Tariffs

      What do you think of tariffs and the US-China trade war?

      Share your insights below.

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      Alberto F. Cavallo
      Alberto F. Cavallo
      Edgerley Family Associate Professor of Business Administration
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