Terms-of-trade and welfare effects of the 2018–2019 US tariff hikes on electrical equipment and plastics

Abstract

ABSTRACT Despite theoretical analyses of the welfare impact of higher tariffs, empirical studies remain relatively scarce. This study bridges this gap by examining the price, terms-of-trade, and welfare effects of the 2018–2019 US tariff hikes in plastics and electrical equipment products, which are crucial to the US and world trade and are ranked among the top 10 largest total value of imports among the 99 harmonized system broad product groups of US imports during 2018–2019. Accordingly, this study a) derives a flexible partial equilibrium welfare model that accounts for terms-of-trade gains and losses and welfare effects under perfectly and monopolistically competitive market settings; b) estimates trade elasticities using average monthly bilateral exports of trade partners to the US at the 10-digit HS level over the January 2016–August 2020 period; and c) estimates the terms-of-trade, efficiency, and welfare effects of the 2018–2019 tariff hikes using estimated elasticities and trade data at the 4-digit HS level. The results suggest that the tariff hikes yielded negative terms of trade, efficiency, and welfare effects on the US economy, the bulk of the welfare loss resulting from increased international free-on-board import prices. The findings call for in-depth industry-specific analyses before rolling out tariff hikes.