Professor Mingzhi Xu | US-China Trade War Tariffs: Unveiling the Hidden Costs to American Consumers

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Professor Mingzhi Xu | US-China Trade War Tariffs: Unveiling the Hidden Costs to American Consumers

Dec 2, 2024 | business and economy

About this episode

Ongoing trade tensions between the United States and China have reshaped global economic dynamics. However, little attention has been given to how these trade policies affect everyday Americans. A new study reveals how US tariffs on Chinese goods have disproportionately affected low-income American households. Research from an international team of scholars, Professors Mingzhi Xu at Peking University, Hong Ma at Tsinghua University, Jingxin Ning at UIBE, and Luca Macedoni at Aarhus University, provides compelling evidence for the benefits of free trade and the overlooked costs of trade barriers.

The researchers assessed household expenditure data from 2016 to 2019, covering before and during significant US tariffs on Chinese goods. One of the study’s most striking findings is that the US-China trade war resulted in a significant increase in the cost of living for American consumers. On average, the additional tariffs led to a 1.09% increase in household living costs. While this may seem modest, it represents a substantial burden when applied across millions of households.

However, the research reveals that lower-income households bear a disproportionately large share of this increased cost. Specifically, households in the lowest 20% income bracket experienced an increase in the cost of living that was twice that of those in the highest 20% income bracket. This finding suggests that protectionism may actually exacerbate economic inequality. But why do we see this disparity?

The researchers identified three main mechanisms: changes in average prices, shifts in expenditure patterns, and changes in product variety. All three mechanisms contributed to the overall effect, but their impacts varied across income groups.

The increased living costs were primarily driven by higher average prices and reduced product diversity. However, consumers reorganised their spending patterns across products to partially adapt. Crucially, the study found that higher-income households were more adept at adjusting their expenditure across products, allowing them to better absorb the shock of price increases.

In contrast, when confronted with price increases, lower-income households were more likely to completely eliminate certain products from their basket and had less ability to adjust their spending on remaining items.

The research serves as a stark reminder of the hidden costs of protectionism and highlights the enduring benefits of free trade, which has allowed countries to reap the rewards of globalisation, such as lower prices, greater product variety, and increased economic efficiency. This research suggests that abandoning free trade principles can quickly erode these benefits, with the heaviest burden falling on those least able to bear it.