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Tariff Increases Expected to Reduce GDP, Report Says

Friday, February 01, 2019
Sandler, Travis & Rosenberg Trade Report

Tariff increases and other trade barriers imposed in 2018 by the Trump administration could lower real U.S. gross domestic product by 0.1 percent through 2029, according to a new report from the Congressional Budget Office.

According to the report, new tariffs were imposed on 12 percent of U.S. imports in 2018, including washing machines, solar panels, and steel and aluminum products from most countries as well as about half of U.S. imports from China, mostly intermediate and capital goods. In response, U.S. trading partners retaliated with their own tariffs on nine percent of all U.S. goods exports, primarily industrial supplies and materials as well as agricultural products.

Assuming that all these changes are permanent and that scheduled changes (e.g., the planned March 1 increase from 10 percent to 25 percent of the U.S. additional tariff on $200 billion worth of Chinese goods) do not take effect, CBO projects that the recent changes will reduce U.S. real GDP by about 0.1 percent by 2022. Specifically, CBO estimates decreases of 0.1 percent in real consumption, 0.3 percent in real private investment, and 0.5 percent in real U.S. exports.

The CBP explains that tariffs reduce domestic GDP mostly by raising the prices paid by U.S. consumers and businesses, which reduces the purchasing power of consumers and increases the cost of business investment. Also contributing to the reduction in U.S. output is a decline in U.S. exports resulting from new tariffs imposed by the U.S. and its trading partners. Partially offsetting those negative effects is a projected small net increase in U.S. output as businesses relocate some of their production from foreign countries to the U.S.

The long-term effects of the trade restrictions are more uncertain, but the CBO estimates that they will reduce the level of potential output in the U.S. economy by 0.1 percent in 2019. Among other things, the report states, the recent changes in trade policy have increased concern that they may signal a fundamental shift in global trade policy and an increased risk of the erosion of the rules-based global trading system that would significantly increase the risks associated with investment in the U.S. and abroad.

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