/Anecdotes vs. Data in the Trade War, by Pierre Lemieux

Anecdotes vs. Data in the Trade War, by Pierre Lemieux

Anecdotes are not necessarily useful to understand the social and economic world. An anecdote based on a sample of one can be worse than useless. A related point: we don’t expect a plumber to be able to criticize the mechanics of fluids; and we don’t expect a businessman to successfully challenge the economics of international trade. Jean-Baptiste Say, author of the 1803 Treatise on Political Economy, was an exception, and he wrote a whole treatise to prove it.

Brian Tedesco, the owner of an unidentified “consumer-electronics sales and distributing company,” wrote an op-ed in the Wall Street Journal of June 30, where he boasts that his customers did not pay the 25% tariff on the goods he imports from China. He says he has “a different perspective,” and that he was able to get from his Chinese suppliers a price reduction that covered most of the tariff.

Exceptions, of course, are not impossible, but they may represent the impact of other economic factors. Mr. Tedesco only gives one example: Bluetooth speakers. I don’t have data on this specific product, but I looked at the audio equipment category of the Consumer Price Index. The data, available from the Labor Department, are reproduced below.

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Since these data cover a wider category than Bluetooth speakers, they do not permit a precise analysis of the market which Mr. Tedesco claims to illustrate. But they do show something remarkable. The price of consumer audio equipment on the American market dropped continuously for a quarter of a century, from the mid-1990s up to 2017. Then, starting roughly with the Trump administration’s trade war, the price suddenly plateaued in 2018 and started ticking upward in 2019.

Virtually everywhere we look, we get the picture of the American consumer absorbing all US government tariffs in higher prices, as economic trade theory predicts (except in rather exceptional situations).

Consider another example: the tariffs on washing machines imposed by the Trump administration at the end of January 2018. The chart below shows the whole price series available for the CPI category of laundry equipment, which also includes dryers. After a first wave of temporary tariffs on washing machines from South Korea and Mexico in 2012, the price of consumers’ laundry equipment dropped continuously. The little price uptick in 2016 is due to a temporary tariff on washing machines imported from China. (See Aaron Flaaen et al., “The Production Relocation and Price Effects of U.S. Trade Policy: The Case of Washing Machines,” Becker Friedman Institute, April 18, 2009.) The 2018 Trump tariff hit all imports of washing machines, and its impact is quite visible on the chart.

Brian Tedesco

It’s important to understand that the actual price impact of a tariff is the current price minus what the price would have been, ceteris paribus, without the tariff. (Note also that a tariff hits only the cost of the actual imports, excluding the value subsequently added by domestic transportation and marketing, for example.) In the case of audio and laundry equipment, the ceteris paribus would likely have been the continuation of the long-term price decline.

More sophisticated econometric studies, which try to incorporate the non-tariff counterfactual, are useful to obtain better estimates. For example, a paper by Mary Amiti et al., “The Impact of the 2018 Trade War on U.S. Prices and Welfare” (NBER, March 2019), which studies the impact of the six waves of tariffs in Trump’s trade war (before the increase of Chinese tariffs to 25% in May), concludes:

We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters. We also find that U.S. producers responded to reduced import competition by raising their prices.