Page 18 - The Impact of the 2018 Trade War on U.S. Prices and Welfare

to the extent that this means that U.S. firms have to find new export markets or offshore to avoid

paying the tariffs, it is likely that the retaliatory tariffs are associated with substantial shifts in

supply chains and possibly large depreciations in capital equipment based in the U.S. Summing

together our estimates for lost exports and imports, we find that by the last month of 2018

approximately $13.8 billion dollars of trade ($2.4 billion of exports and $11.4 billion of imports)

per month was being redirected as a result of the tariffs, which amounts to $165 billion on an

annual basis.

6. Assessing the impact of tariffs on imported varieties

The standard textbook model used in the previous sections is based on the assumption that

imported and domestic varieties of goods are perfect substitutes. However, in reality, the products

produced in one country can be imperfect substitutes for those produced in other countries. Indeed,

one of the distinguishing features of “new trade theory” is its emphasis on how increases in trade

barriers can reduce welfare by restricting consumer’s ability to purchase new imported varieties.

In these models, consumers benefit from trade liberalizations because it gives consumers access

to varieties of products—French wine, Colombian coffee, and Hungarian paprika—that might not

be purchased if trade barriers were higher. If trade liberalization is associated with increases in

varieties, one might well wonder whether the 2018 tariffs have resulted in a reduction in imported

varieties and what the welfare costs of these variety losses have been.

Figure 7 presents some evidence on how the trade war has influenced imported varieties, where

we define a variety as a country-HTS10-digit code (e.g. French red wine). For each set of HTS10-

country codes that were affected by a particular wave of tariffs, we compute a count of the number

of varieties imported. We use the same normalization as before, so month 0 corresponds to the last

month before the new tariffs were implemented, and we normalize the number of varieties within

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