President Donald Trump’s trade war has backfired and hurt the industry it was intended to help, according to a Federal Reserve report.
Federal Reserve economists Aaron Flaaen and Justin Pierce issued the “first comprehensive estimate” of the effect of Trump’s trade war on American manufacturers and found that it has been a dud.
"We find that U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs," the report said.
The economists found that the tariffs gave manufacturers a “small boost” but it was “offset by larger drags from the effects” of China’s retaliatory tariffs and added costs.
Consumers hit hard:
The report cited extensive existing research showing that “the majority of U.S. tariff increases are absorbed by U.S. retailers” and then passed on to American consumers.
The report also showed that while some tariffs helped protect American manufacturers from foreign competitors, those same American firms were hurt by tariffs on materials as well as retaliatory tariffs.
The report noted that the effects of the trade war could "explain a shift in voting away from Republican House candidates in the 2018 election.”
Study only looked at short-term trends:
The report acknowledged that the effects the economists studied were short-term and long-term trends may be different.
But the report also concluded that tariffs in general simply do not work in an economy that relies on global supply chains.
"Our results suggest that the traditional use of trade policy as a tool for the protection and promotion of domestic manufacturing is complicated by the presence of globally interconnnected supply chains," the report said. "While the potential for both tit-for-tat retaliation on import protection and input-output effects on the domestic economy have long been recognized by trade economists, empirical evidence documenting these channels in the context of an advanced economy has been limited."
