According to a research report released on the official website of the Federal Reserve Bank of New York on Wednesday, the tariffs imposed by US President elect Trump on China during his first term have had a more negative impact on the US economy than previously estimated.
This research result comes at a time when Trump is threatening to impose more tariffs on US trading partners after taking office in January next year - a move that is bound to inject new uncertainty into the US economic outlook.
According to researchers from the New York Federal Reserve, during 2018 and 2019, the Trump administration announced high tariffs ranging from 10% to 50% on over $300 billion worth of goods imported from China, and China subsequently retaliated by imposing tariffs on US exports. The negative impact of the US China trade war on the US economy may be far greater than previously estimated.
The report points out that estimating the overall impact of the trade war on the US economy is challenging, as tariffs can affect the economy through many different channels. In addition to changing relative prices, tariffs can also affect productivity and create economic uncertainty. Furthermore, these impacts may take several years to manifest in the data, making it difficult to know what the future effects of tariffs may be.
In terms of its impact on financial markets, research by the New York Fed has found that the announcement of tariffs has a significant impact on stock market valuations. The New York Fed staff documented this impact by studying the market trends on the day of the earliest announcement of the tariffs by the United States and China in the media.
After the announcement of tariffs in March 2018 and May 2019, the returns of the US stock market are particularly likely to face a significant decline. Overall, the cumulative decline of the US stock market on the 11 tariff announcement days reached 11.5% - equivalent to a loss of $4.1 trillion in market value.
Although some people may tend to view these short-term declines as an overreaction of the market, the actual statistical data contradicts this explanation - as market downturns will continue for a period of time. The following chart shows the cumulative returns of US stocks within ten days before and after the tariff announcement. The New York Fed found that this market effect occurred entirely on the trading day corresponding to the tariff announcement, indicating that the market did not fully anticipate the release of these tariffs in advance, and within a week after the announcement, the market did not form an effective rebound.
Researchers also suggest that the decline in stock market prices may reflect two forces. Firstly, the market may become more pessimistic about future company profits; Secondly, even if the expected path of future profits remains unchanged, market participants' willingness to hold risky assets may decrease. Research has found that these tariff announcements have indeed stimulated investors to flee to safe haven assets, causing a decrease in US Treasury yields (with five-year bonds having the greatest impact) and an increase in equity premiums (the difference between stock returns and risk-free asset returns).
The New York Federal Reserve used these results to estimate the "overall welfare effect" of tariffs - welfare effect refers to the impact of policy changes on individual or social welfare.
Taking into account these market reactions and their impact on dividend income, interest income, labor income, and taxes, researchers from the New York Federal Reserve found that the overall impact of tariff announcements on expected welfare is -3%.
The researchers wrote that although this impact is much smaller than the impact on stock market value (-11.5%), this figure is significantly higher than the welfare estimate of the standard trade model.
This finding suggests that previous trade models may have overlooked other important channels through which tariffs affect the economy, such as the inhibitory effect of tariffs on innovation, the negative impact of increased trade uncertainty on investment, or the unstable impact of tariff announcements on global trade policies.