January 29, 2019 CBO's Budget and Economic Outlook indicates recent changes in trade policy may contribute to lower US economic growth In The Budget and Economic Outlook: 2019 to 2029 (releasedJanuary 28, 2019), the Congressional Budget Office (CBO) analyzed how recent changes in trade policy could affect US economic performance over the next decade. The CBO projects that, under current law, recently imposed tariffs by the United States and its trading partners will lower US economic growth on average by 0.1% through 2029. Recent trade policy changes In March of 2018, the Trump Administration imposed tariffs on approximately $250 billion of merchandise imports from China. This represents about half of all US imports from China. The tariffs, which range from 10% to 25%, apply to more than 7,000 goods, including healthcare products, industrial equipment, food, chemicals, minerals, tobacco, electronics (excluding certain consumer electronics, such as the iPhone), and office goods. Additionally, the Trump Administration imposed 25% tariffs on steel imports and 10% tariffs on aluminum imports, including those from China. Overall, in 2018, the US imposed new tariffs on 12% of goods imported into the country. In response, China placed tariffs of similar rates on imports from the United States and announced that it would reduce tariffs on a wide variety of goods from other trading partners, effective November 1. US trading partners responded with retaliatory tariffs on 9% of US exports. The Trump Administration has threatened to impose tariffs on the remaining imports from China. Current tariffs on Chinese imports are scheduled to rise to 25% in March of 2019.1 Figure 1 provides a breakdown by category of goods of the share of US imports and US exports affected by the tariffs recently imposed by the United States and its trading partners. Figure 1. Share of category of goods affected by tariffs recently imposed by the United States and its trading partners Source: Congressional Budget Office, The Budget and Economic Outlook: 2019 to 2029, January 28, 2019. Effects of tariffs on US economy The CBO projects that the recent tariffs imposed by the United States and its US trading partners will reduce economic growth through 2029 on average by 0.1%. This reduction stems from decreases in consumer spending and private investment, which result from increased prices that consumers and businesses pay for imported products, as well as increased prices of domestic products with imported tariffed components. Similarly, the decline in US exports as a result of the retaliatory tariffs also contributes to the decrease in economic growth. The impact could be larger if the US tariffs on Chinese imports rise in March 2019 and China retaliates. Furthermore, the CBO estimates that the tariffs will increase the price index for personal consumption expenditure by 0.1% and the price index for private investment by 0.5% by 2022, which also means consumer spending and private investment will decrease. Therefore, tariff-induced effects are forecast to reduce real consumption by 0.1% and real private investment by 0.3% by 2022. Implications Tariffs have unintended effects that go beyond the sectors they target, as well as economy-wide effects due to industry-linked supply chains. To remain competitive, minimize possible disruption to their operations, and reduce their production costs, US businesses should consider developing strategies to mitigate the negative effects of the tariffs by reassessing their global supply chains and planning for backup options, such as considering alternative sourcing or routing of their imports. ———————————————
——————————————— 1 This increase seems to have been postponed due to a December 1, 2018 meeting between President Trump and President Xi Jinping. | |||||||||
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