August 26, 2019
Last week, the Congressional Budget Office (CBO) released “An Update to the Budget and Economic Outlook: 2019 to 2029.” In a follow-up on Thursday, a CBO analyst wrote about how tariffs factored in to the new economic projections. Specifically,
higher trade barriers—in particular, increases in tariff rates—implemented by the United States and its trading partners since January 2018 reduce the level of real (that is, inflation-adjusted) U.S. gross domestic product (GDP) by roughly 0.3 percent by 2020. The tariffs raise domestic prices, thereby reducing the purchasing power of domestic consumers and increasing the cost of business investment. The tariffs also affect business investment by increasing businesses’ uncertainty about future barriers to trade and thus their perceptions of risks associated with investment in the United States and abroad. In CBO’s projections, the economic effects of the tariffs wane after 2020, as businesses make adjustments to their supply chains to mitigate the costs associated with the tariffs.
In addition to reducing real GDP by 0.3 percent, CBO estimates these trade barriers will reduce average real household income by $580 by 2020.
The report also notes that the U.S. has imposed tariffs on 11 percent of imported goods since January 2018 and that tariffs cover “about half” of our imports from China. Meanwhile, “retaliatory tariffs had been imposed on 7 percent of all goods exported by the United States—primarily industrial supplies and materials as well as agricultural products.”
CBO’s analysis includes tariffs in effect as of July 25. CBO warned, “Imposing higher tariffs on a wider array of items would have larger economic effects.”
Then, on Friday, China announced new tariffs on $75 billion worth of U.S. products, including aircraft. President Trump then announced that the U.S. will increase tariffs by 5 percent on $550 billion worth of Chinese goods. As the New York Times reports,
Twelve hours after China said it would retaliate against Mr. Trump’s next round of tariffs by raising taxes on American goods, Mr. Trump said he would bolster existing tariffs on $250 billion worth of Chinese goods to 30 percent from 25 percent on Oct. 1.
And he said the United States would tax an additional $300 billion worth of Chinese imports at a 15 percent rate, rather than the 10 percent he had initially planned. Those levies go into effect on Sept. 1.
Also last week, the president of the Federal Reserve Bank of Dallas said, “The fulcrum or center of gravity of the U.S. economic policy today is not monetary policy, it is trade uncertainty.”Categories: Categories , Economy , Tax Policy.